Month: March 2014

Saddam Hussein tops list of 5 biggest bank heists

Posted on by Ashton Wenborn

Over the last century banks have been broken into in all manner of ways – from the elaborate to the bizarre – and vast sums of money have been stolen.

Dangerous and mysterious, the popularity of classic caper movies and books proves that they have well and truly entered the public consciousness. Here we look back at some of the biggest, most iconic, most damaging robberies in history.

1. Central Bank of Iraq ($1bn, 2003)

What is by far the largest bank robbery in history was not perpetrated by a normal off-the-street criminal. In fact, in an audacious move, nearly $1bn was stolen from Iraq’s Central Bank by its very own dictator.

Saddam Hussein, anticipating that US bombing would begin the very next day, sent his son Qusay to the bank with a handwritten note ordering that the money was withdrawn.

US troops later found approximately $650m in Saddam’s opulent palace, but the rest was never found. With Saddam’s execution and Qusay’s death in a fire fight with US troops, the remaining $350m may never be found.

2. Dar Es Salaam Bank ($282m, 2007)

July 11, 2007, and managers at the Dar Es Salaam Bank in Baghdad enter the vault for a normal morning check. To their surprise, and overnight, the bank’s guards had laid bare the bank’s coffers, taking $282m.

The heist was a classic inside job according to officials, who said the guards must have had links with the militia to escape Baghdad without being stopped at a checkpoint. It was not clear why the bank had so much cash on hand, but most of the money has since been recovered.

3. Banco Central ($71.6m, 2005)

The Banco Central Heist in Fortaleza in Brazil is a heist so elaborate, it probably deserves its own film. Three months before the burglary, a gang of criminals rented an empty house in the centre of Fortaleza, just two blocks away from the bank. Over the next few weeks, and under the pretence that the building was a plant shop, the burglars excavated a 78m (256ft) tunnel to the bank’s vault.

On the final weekend, they broke through the reinforced concrete and evaded the security systems to make off with $71.6m. So far, authorities have only recovered $3.8m of the notes.

4. United California Bank ($30m in 1972)

On March 24, 1972, a group of seven men from Ohio broke into a branch of the United California Bank in Laguna Niguel, gaining access to the safety deposit vault. Inside they managed to loot what was, at the time, a world record amount at approximately $30m (worth $100m today), but due to the undeclared nature of safety deposit boxes the true value was never ascertained.

The theft was executed perfectly, but a few months later the gang performed a similar crime back in Ohio. The burglaries were linked by the FBI and the gang soon arrested.

5. Bank of America ($1.6m, 1998)

In 1998 an ambitious plan to rob the Bank of America’s World Trade Centre branch went off without a hitch, but blunders by the perpetrators after the event quickly led to their capture. Struggling mobster Ralph Guarino orchestrated the plan by convincing a friend who worked in the building to give him access to it.

The money was seized by three gunmen, including Guarino, from couriers delivering a fresh supply of cash to the bank. The FBI quickly tracked Guarino and his team down, who had become a major target of other New York gangs looking for a slice of the haul. In light of this, Guarino elected to become an FBI informant rather than settle for jail time.

QIB sprearheads innovation in Islamic banking products

Posted on by Ashton Wenborn

A select few constituents of the Islamic banking industry have recently come to be considered equal and even superior at certain aspects to their conventional banking counterparts, due to a more expansive range of products and services. Leading industry players in particular have committed a great deal of time and resources to develop Islamic banking products that add value to their offerings, not least of which being Qatar Islamic Bank (QIB), which has set itself apart from the competition in this field.

First established in 1982, QIB is the first Islamic Bank in Qatar, and among the first ones globally. Today, QIB holds 35 percent of the country’s burgeoning Islamic sector, as well as nine percent of the overall banking market. The institution’s capital, as of the end of 2013, amounted to QR 2.36bn with assets of QR 77.4bn, and the bank will continue to spearhead progressive developments in this space provided its strategy remains relatively unchanged with regards to product innovation.

A new hedging mechanism
One of the most recent innovative Islamic banking products developed by QIB is a highly flexible sharia-compliant legal framework developed for the purpose of executing a wide range of sharia-compliant hedging transactions.

The mechanism is underpinned by a Wa’ad (promise) and a commodity trading structure, requiring QIB and a trading counter party to jointly sign master terms and conditions along with two master undertakings where each counter party undertakes to ‘purchase’ sharia-compliant commodities from each other under diagonally opposite conditions, along with an agency agreement where QIB is appointed to act as agent to buy or sell commodities on behalf of the trading counter party depending on which undertaking is exercised.

One of the most recent innovative products developed by QIB is a highly flexible sharia-compliant legal framework

The innovative platform can be used for hedging QIBs various market exposures and to structure innovative hedging solutions primarily for its corporate and wholesale clients. QIB will always hedge itself when offering client products in order to maintain a market neutral trading position.

The hedging mechanism is extremely flexible and will therefore be used to develop a diversified range of sharia-compliant risk management products, which in turn can be used to swap or vary exposures across all relevant asset classes such as currencies, profit rates, equities and commodities.

The mechanism was used to provide a sharia-compliant profit rate hedge for a project finance deal. The Islamic hedge was the first of its kind in Qatar. The hedge was linked to the Islamic portion of a $500m financing provided by QIB and a consortium of local Islamic and conventional banks to a major local corporate for the construction of a strategic national infrastructure project, a deal which was concluded in Q3 of 2013. QIBs hedging mechanism was selected as the basis for providing the Islamic hedge, and was used by all the Islamic banks involved in the finance deal due to its robustness and flexibility.

QIB plans to further develop the products in 2014 to be able to offer innovative structured investment solutions to eligible counter parties.

Innovative products
The implementation of cutting edge Islamic banking products and services has long formed an integral part of QIBs business strategy. As a result, the bank boasts one of the most complete product portfolios not just in Qatar, but in the world of Islamic banking, spanning from plain vanilla corporate financing, project finance, syndications, transactional banking, Takaful to personal finance, investments, and a variety of other banking products and services to meet the needs of the bank’s segmented client base both in corporate and personal banking.

This long standing focus on product innovation and portfolio expansion forms part of QIBs mission to be seen as a customer centric institution by those in the industry and the wider banking public. However, it would appear that the strategy also brings with it far greater profit bearing potential, with last year’s profit, equating to QR1.34bn and a growth rate of 7.6 percent. As is made clear in the case of QIB, product innovation is essential for the wider Islamic banking community if it is to boost its competitiveness further still and be considered equal in stature to its more traditional western counterparts.

Corporación América project to resolve ‘Chile Axis bottleneck’

Posted on by Ashton Wenborn

The Corredor Bioceanico Aconcagua project, known as the CBA, is an Argentine private initiative charged with the construction and implementation of a state-of-the-art high-load-capacity railway network linking the Chilean Pacific ports with the Argentine, Uruguayan an Brazilian ports and hubs, which, on completion, will cement a new level of physical and commercial integration between the Southern Cone countries and the continent.

The initiative, presented by the Argentine holding Corporación América, aims to resolve the Mercosur – Chile Axis bottleneck – with the construction of a 205km multimodal rail corridor that includes a 52km base tunnel under the Andes. This new terrestrial pass will not only operate all year round, but it will also make significant savings in terms of costs and transit times.

The transit system, when in its final phase will carry up to 77 million tonnes of cargo per year, ranging from containers to trucks, will improve the crossing itself, and will also bolster the vast network of roads, rails and ports on both sides of the Andes.

Spanning a vast region of growth
The network is made up of thousands of kilometres of road, water and rail tracks, which connect Brazil and Argentina’s most productive regions with Chile’s access to the Pacific Ocean. The footprint of this network spans three million square kilometres, home to 126 million people and accountable for 70 percent of the region’s GDP generation.

With this innovative approach, the integration of Mercosur (Argentina, Brazil, Uruguay and Paraguay) will, improve competitiveness and general welfare locally, regionally and globally. Chile will also be substantially improved, given that the CBA eliminates the current bottleneck in land transit across the Argentine-Chile border.

Argentina and Chile share one of the world’s longest land borders, however, the uncompromising terrain means that existing terrestrial passes are far from ideal. Today, as much as 70 percent of the land freight that passes the Andes through Chile and Argentina does so via the Cristo Redentor Pass (CRP), which remains unreliable at best due to altitude and weather conditions.

The CBA Project

250km

Multimodal rail corridor

77m

Tonnes of cargo per year

10 YRS

stage 1 construction schedule

In addition to lengthy closures, the CRP is near to total capacity saturation (at five million tonnes of cargo per year) and boasts very little opportunity for expansion. Argentine and Chilean governments have been working to improve the CRP or CR Pass – both in terms of hardware and software – but optimistic projections are aiming to expand capacity up to no more than seven million tonnes per year.

The geography of the region allows for little in the way of expansion for the current system. As a consequence, 80 percent of the cargo that passes between the two bands of the Southern Cone travel by sea, even in instances where these routes are longer and more expensive.

The multimodal rail system has been implemented as a result of six years worth of study, and the finished product’s high load capacity, at 24 million tonnes per year at stage one and 77 million tonnes by stage three, along with its strategic construction should allow for a 365 days a year uninterrupted service. The electric railway, which spans 205 km from Los Andes to Luján de Cuyo, in the same gauge of the Chilean and Argentinean railway networks will open new possible route combinations to trade, allowing each operator to design the optimal route with a dramatic increase in delivery certainty.

Aside from increased efficiency and regional competitiveness, the system offers a number of advantages over existing infrastructural links. The project’s construction in three stages allows investment recovery to be consistent with demand, seriously reducing risks. The system’s multi-modal capacity ensures the project is made far more flexible than the existing road system, creating synergies and efficiency allowing several possible combinations; and mainly, increased economic efficiency through arrival certainty and quicker crossing times (four hours at stage one and two and half hours at stage three compared with the current 12 hour cross). There is also lower energy consumption all round.

Well structured scheduling
The construction schedule for stage one is expected to span 10 years, and involves the build-out of the base tunnel and critical path, which in turn defines the length of the works. The construction design of the tunnel features four excavation fronts, which will be almost entirely excavated with specific tunnel boring machines (TBM).

The lead-up to this point, however, has been a long a complex process, and one that has required no small measure of co-operation and collaboration on the part of various authorities and institutions.

Argentina and Chile share one of the world’s longest land borders, however, the uncompromising terrain means that existing terrestrial passes are far from ideal

The two private initiatives were simultaneously presented to the Ministry of Public Works of Chile and the Ministry of Federal Planning Argentina in January 2008, and the project was declared of Public Interest to Chile and Argentina in August and September 2008 respectively.

In March 2009 the Feasibility Study (phase one) was presented to both governments and in October the two countries signed the Bilateral Agreement and the Additional Protocol of Maipú, in effect creating the bi-national entity for bidding and regulation of the CBA project.

In July 2011, the Final Project (phase two) was delivered to the bi-national entity, along with the delivery of phase two studies, and an audience was held with the President of Argentina, Cristina Fernández and Chile’s Sebastian Piñera.

After the delivery of the technical proposal to the binational entity in July 2011, a project review period was undertaken by both states and in March 2012 the presidents of Argentina and Chile began feasibility tests for the project, and started developing the basis for the bidding process. In April 2012, 160 comments on the technical proposal were delivered to the proponent and initiator, and incorporated into its overall make up.

During this six-month review period, several joint meetings were conducted, which together served to deepen the discussion about the proposed project (geological studies, base tunnel design, tunnel safety, tariff analysis and willingness to pay by CBA users, demand study complementation, and a legal feasibility study).

An innovative business model
The CBA project in its entirety is innovative on several counts; namely that it is the first time a private consortium will present a project of this kind to the public sector. This “private approach” comprises a 10-year construction planning line and a 50-year operation concession within a binational legal and political framework.

CBA timeline

2008

Project is declared of Public Interest to Chile and Argentina

2009

Two countries sign Bilateral Agreement and the Additional Protocol of Maipú

2011

Phase two proposal delivered

2012

Feasibility tests begin

In the proposed Business Model and Guarantee Scheme, the private parties will assume the risks of their capital investment while the Argentine and Chilean States offer certain guarantees and contingent risks to make clear their commitment in facilitating the long-term financing required of this project.

Argentine holding Corporación América has formed an international consortium to implement and finalise related feasibility studies. Together with Corporación América, this group includes Empresas Navieras of Chile, Mitsubishi Corporation of Japan, Geodata SpA of Italy and Contreras Hermanos from Argentina. The incentives outlined in the CBA business model are designed to enhance the long-term concession scheme for both existing and future consortium members.

The design of this financing structure is based on a shared risk model and guarantee system, which is in turn based on successful experiences in the region with the backing of multilateral credit organisations (MCOs), and is focused on easing and simplifying the risks shared between Chile and Argentina.

Coupled with the PPP scheme the private initiative will open new opportunities for tackling mega projects in the private sector. The approach, designed from a private design and planning team perspective, puts new opportunities on the table to optimise key aspects of mega infrastructure initiatives.

For one, there it creates an incentive for the private sector to propose and design new mega infrastructure projects so as to ease infrastructural bottlenecks, and there is certainly more conceptual freedom in the planning and construction space. There are also incentives for stakeholders to optimise the long-term success and efficiency of the system, while the project’s financing guarantees minimal fiscal risk for the state, and cuts the overall costs of the project.

No matter the means by which it is accomplished, the Bioceánico Aconcagua project aims to afford goods travelling through Chile and Argentina a far more efficient route through the Andes and greater commercial ties than ever before. The upshot is that not only the trade between Chile and Argentina will no doubt rise, but the trade between the countries of the region as well.

Perhaps the greatest physical and commercial void to be broached by CBA is the Bioceanic factor, cutting down shipping costs and times for Brazilian and Argentine goods seeking Chilean ports and Asian markets, and Chilean and Asian exports aimed at the Mercosur commercial hubs and ports.

However, what is key about the project is the financial terms and conditions that underpin its development, as they represent the sheer scale of what can be achieved if private and public parties work to settle differences and minimise risk.

Wall Street faces fixed income slump, but is it all bad news?

Posted on by Ashton Wenborn

Worrying signs that Wall Street’s largest investment banks are set for another period of cut backs could be imminent with the announcement of disappointing first quarter revenues for fixed income divisions.

It is thought that revenues could be down by as much as 25 percent when first quarter results are revealed next month, leading to a series of staff cuts at banks, including Citigroup, JPMorgan Chase and Credit Suisse.

One firm not looking concerned about fixed income is Morgan Stanley

Recently Citigroup and JPMorgan pre-empted the poor results by stating they would likely see revenues drop considerably.

Citigroup’s finance chief John Gerspach told reporters it would likely see a drop by a “high mid-teens” percentage. Last week also saw revenues at the fixed income division of boutique firm Jeffries Group slump 17 percent, signalling a trend in the rest of the industry that results were set to be disappointing.

The news will see revenues fall for the fourth consecutive first quarter of the year, at a time that is traditionally the most lucrative for investment banks. According to sources that spoke to the Financial Times, at least two of five biggest fixed income divisions will axe a large number of jobs as a result of the poor performance.

Citigroup last year saw trading of roughly $13.1bn in fixed incomes, currencies and commodities, a figure that is unlikely to be repeated this year. JPMorgan made $15.5bn from the same side of the business.

Both firms are expected to put more of their focus over the coming year on equity trades, as they move away from their disappointing fixed income businesses.

One firm not looking concerned about fixed income is Morgan Stanley. CEO James Gorman told Fox Business Network that it makes up a small part of their business, so wouldn’t seriously harm its operations.

“We’ve been criticised a lot about our fixed-income business the last couple of years. And as I tell folks, the bad news is it’s only 12 percent of Morgan Stanley. The good news is it’s only 12 percent of Morgan Stanley.

“That fixed-income franchise actually has significant upside from where it’s been in the last couple of years as we’ve retooled it. So I’m much less worried about fixed income than maybe most folks are.”

Top 5 most expensive cities

Posted on by Ashton Wenborn

Singapore

10 years ago Singapore ranked 18th, however, a strong currency, sky-high utility bills and lofty car ownership fees have together bumped up the city’s prices by quite extraordinary degrees. Singapore also plays host to one of the widest wealth gaps in the world as well as an average annual per capita income of some $50,000.

Paris

The city’s 20 percent sales tax and notoriously expensive goods and services mean that the French capital is still one of the most financially demanding places to live in the world. To compound the cost of living further still, the average price of a centrally located apartment comes to over $13,600 per sq m.

Oslo

Oslo has ranked amongst the most expensive cities worldwide for some time now. Although the Norwegian capital’s house prices fall short of  its major rivals, the price of common goods is above and beyond most – the city’s university recommends that students keep a minimum of NOK10,000 ($1674) to cover basic expenses.

Zurich

Although taxes are famously low, the price of insurance, services and common goods is significantly higher than most of its European counterparts. Due to excessive property prices the vast majority of the city’s inhabitants choose to rent accommodation, and the average individual spends near 16 percent of their salary on housing and energy combined.

Sydney

Sydney is the most expensive city in Australia, and indeed one of the most expensive worldwide in terms of property prices – the average house here will set you back a cool $700,000. In addition to stratospheric house prices, the currency’s gain ahead of the dollar has proceeded to push up the price of goods and services further still.

Acting CEO to drive innovation and growth at Qatar First Bank

Posted on by Ashton Wenborn

Islamic finance has gathered momentum and gained quite an extraordinary reputation these past few years, and is now a mainstay of the global financial system, thanks in part to the work of those leading its many sharia-compliant constituents. First among the regions to have benefited is the GCC, which has seen a remarkable rise in Islamic banking of late and has come to represent a key focal point for the industry going forward.

Since Islamic banking entered its ‘modern phase’ a little over three decades ago, it has undergone numerous fundamental changes to its makeup, in addition to having overcome the many and diverse challenges posed to it by the international financial community.

Qatar First Bank’s newly appointed Acting CEO, Ahmad Meshari, has overseen the development of Islamic finance in Qatar. “After demonstrating its resilience to economic downturns, Islamic finance has gained global interest with non-Muslim countries like Britain looking at ways to tap into this emerging market. In Qatar, many initiatives were undertaken to ensure proper regulation and encourage the introduction of innovative retail products to allow this niche sector evolve into a profitable oriented industry,” said Meshari to Investvine. “Islamic finance still has a lot of potential for growth. According to a study undertaken by Ernst & Young, it is expected to cross the milestone of $2trn [worldwide] by 2014.”

Meshari’s proficiency in navigating the region’s complex financial landscape is due to 30 years of experience in financial services and his capacity to conquer the obstacles that have arisen throughout his career.

Meshari’s proficiency in navigating the region’s complex financial landscape is due to 30 years of experience in
financial services

Meshari’s first steps in the industry were taken in 1982, studying Business Administration at Kuwait University and specialising in banking and finance at the same time working as a public relations officer for the Kuwaiti government. Meshari progressed to commercial and administrative manager for Meshwar Al-Kuwait Commission Agent, of which he was also the co-owner, where his business administration training was employed to full effect.

Meshari later returned to the Kuwaiti government in 1988 and assumed the role of loan officer, participating in preparing the annual budget, setting criteria for loan applications, coordinating the timely collection of payments and generally putting to practice his penchant for financial affairs.

His experience in dealing with these matters would remain with him, as he went on to open his own convenience store in Ottawa in 1993, and manage the day-to-day operations, whether they were financial planning, procurement or selling. It was a mere four years before he was awarded an MBA and soon after crossed the Atlantic to join Qatar Islamic Bank as a relationship manager.

Climbing the ladder
Meshari’s beginnings in corporate banking saw him combine the attributes he’d honed on the job previously, as his experience dealing with clients and financial prowess were put to use when identifying prominent clients for the bank. After four years in the role, he began a new tenure as contracting and real estate department manager for the firm. With this responsibility would come a portfolio worth QAR 2.8bn, as well as a raft of new responsibilities.

He would move up the ladder again in 2004, as he took on a role as an executive manager and assumed responsibility for a portfolio worth QAR 6.5bn, as well as for the division’s strategy, business plan and goals.

It was from this point that onlookers began to take Meshari’s achievements seriously, and he became sought-after as a top talent in corporate Islamic banking. Following a year-long stint at Sharjah Islamic Bank as head of corporate banking and senior vice president, Qatar Islamic Bank rehired him in 2008, and he was appointed to the positions of assistant general manager and head of corporate banking.

It was on his return trip to Qatar Islamic Bank, and a short two years after his promotion to general manager in 2008, that he would finally be appointed acting CEO, go on to lead the firm’s transformation and promote a performance-driven culture from the top down. After having acted out his three-year strategic plan and identified a number of new market segments and value propositions, Meshari stepped down in 2013 and acted instead as deputy chief executive to focus on developing a business strategy and extending the bank’s market share.

The firm is continually scoping out
investment opportunities

Meshari’s experience in financial services is far from confined to his work with Qatar Islamic Bank. Quite the contrary, he is a Fellow at the Arab Academy for Banking and Financial Services and a Certified Lender of Business Banking since 2003, appointed by the US Institute of Certified Bankers.

New position
Meshari’s valuable contribution to the world of Islamic banking looks on course to continue with his recent appointment as Qatar First Bank’s (QFB) new Acting CEO, a position he will no doubt relish given his experience in the market and proven ability to identify emerging market opportunities.

Established in 2009 and formerly known as Qatar First Investment Bank (QFB) ranks among the region’s most enterprising sharia-compliant financial institutions and offers a comprehensive suite of financial services and products. With fully paid up authorised capital of QAR 2bn ($550m), QFB is well positioned to negotiate the burgeoning Islamic finance market in the wider MENA region, and having appointed Meshari as Acting CEO, the firm’s prospects look bright.

Regulated by the QFC Regulatory Authority (QFCRA) and ISO 27001 certified, QFB offers services spanning principal investments, asset management, corporate and finance, and recently introduced commercial banking services on a personal and wholesale basis.

The bank is entirely unique in Qatar, in that it’s simultaneously independent and central to the market, providing clients and counterparties with access to one of the region’s deepest pools of capital. Underpinned by Meshari’s expertise in the sector, QFB adopts an investment strategy that centres on sector and geographical diversification, and targets the sectors it considers to be key drivers of economic change, these being energy, financial services, industrials, real estate and healthcare.

Among the most impressive contributions to these sectors is a $111m investment in the healthcare sector – a 20 percent stake in Memorial Health Care Group in Turkey; and a 4.78 percent stake in UAE-based Al Noor Medical Company. Both investments, as with a great many others, performed strongly, Memorial Healthcare in particular, having registered a CAGR of 52 percent from 2010-13. Another of the firm’s many impressive investments can be seen in the industrial sector, with the acquisition of a 71.3 percent stake in Emirates National Factory for Plastic Industries (ENPI), which after 3.4 years QFB exited and generated an internal rate of return of 31 percent.

The firm is continually scoping out investment opportunities in and beyond the aforementioned sectors (see Fig. 1), and invests in businesses that maximise shareholder value through robust growth and significant capital appreciation. QFB’s investment track record is proof of the bank’s success, and since its inception the bank has invested $579m in 18 transactions spanning the GCC, broader MENA and Turkey, managing to generate profits annually and successfully exiting four investments and one partial exit thus far.

Not least of QFB’s achievements is its strong financial record these past few years. The bank’s earnings per share rose 45 percent from 2.48 cents in 2010 to 3.61 cents in 2012, and its net income also exhibited 45 percent growth through the same period, amounting to $31.1m in 2012. Owners’ equity was up 2.4 percent through the same period, to $465m, and a progressive dividend policy for shareholders has seen the bank distribute five percent, six percent and seven percent of paid up capital through 2010, 2011 and 2012 respectively.

Under Meshari’s leadership, the bank has set in place an ambitious plan for the future, and is hoping to soon list its shares on the Qatar Exchange, which would reaffirm its stature as a formidable sharia-compliant financial institution. QFB will no doubt continue to build upon its achievements thus far under Meshari’s watch and expand further still on its MENA footprint. With the new Acting CEO’s eye for financial opportunities and keen understanding of the marketplace, QFB is on course to reap a far greater share of the market and spearhead growth in Islamic finance.

Grupo Hermes develops Mexico’s cultural infrastructure

Posted on by Ashton Wenborn

PPPs have long been proven an efficient and sustainable way of financing public services and projects. Governments the world over have resorted to embarking on these partnerships with private institutions as a viable alternative to financing costly infrastructure, and to deal with the ongoing costs of running large projects.

According to the International Project Finance Association (IPFA), “in many countries the financing requirements of current and prospective infrastructure needs far outstrip available resources.” For the Mexican government, PPPs have long since been a key tool to finance cultural infrastructure in particular, with a huge degree of success.

According to the World Bank, the financial crisis that afflicted global markets between 2008 and 2011 served to fuel interest in PPPs. “Facing constraints on public resources and fiscal space, while recognising the importance of investment in infrastructure to help their economies grow, governments are increasingly turning to the private sectors as an alternative additional source of funding to meet the funding gap,” reads the World Bank’s Infrastructure Resource Centre.

Mexico has certainly not been the exception, and though the country continues to see strong growth, other setbacks have imposed restrictions of the public purse. Focusing on basic needs of the people and the economy has always been the nation’s policy. Schemes such as PPPs allow its to keep this focus, while financing key infrastructure projects. The Gran Museo del Mundo Maya, is one such success story.

Celebrating heritage
The museum, located in Mérida, Yucatán, celebrates Mayan culture. The Yucatán peninsula of southern Mexico was a Mayan stronghold and as such the ancient culture is a fundamental influence in the region today. In fact, Yucatán is one of the tourism epicentres of Central America, as visitors flock to the peninsula to visit Mayan architectural relics, left over from over a thousand years ago. In many ways, Mayan civilisation lives on in the modern inhabitants of Yucatán.

The Gran Museo del Mundo Maya

2013

Grand opening

800

Pieces on display

$58.3m

Grupo Hermes expenditure

The Gran Museo del Mundo Maya was conceived as a platform where visitors can experience and witness Mayan culture and its legacy. It is also a ground-breaking project for the Yucatán province, who have been financing its tourism infrastructure projects exclusively by PPPs since 2011. The museum project was the first of its kind in the region and will serve as a template for future enterprises.

These schemes are a form of joint work that require even greater acceptance in financial culture of the country and in the next few years, it will be refined and will enjoy greater popularity. As for the construction of infrastructure in Mexico, the history of multiple or combined participation in project financing is very recent, and is the reason why this will need to work to achieve greater momentum.

When the government lacks resources to carry out works that require substantial investment, these kind of schemes come in use. The Gran Museo del Mundo Maya was developed in partnership with the Inter-American Investment Corporation (IIC), who provided a loan of $7.4m to develop and outfit the museum and its exhibits, and well as the upkeep of the facility.

Opening its doors in September 2013, it is the home to over 800 pieces, from textiles to religious artefacts. It also contains a large cinematic projection room. It is the museum’s architecture and design that truly make it a memorable enterprise.

Developed by Grupo Hermes, it boasts an intricate tower structure covered in a colourful steel frame resembling local knitting patterns. It is a bold project that required 12 months of solid construction work to go up. Grupo Hermes has been the local government’s main partner in this PPP, and the company has already collected a number of Mexican and international accolades. The work marks a milestone as it is the first museum built with this kind of advantageous scheme.

Successful implementation
Similar partnerships could be on the cards in the future. Public policies actually achieving a greater impact for the benefit of the population will require joint investments with the aim of providing not only more but mainly high quality service, and this will need to go to PPP systems, and support a situation of restricted economy.

According to the IPFA, when projects are developed as PPPs “there is evidence of better quality in design and construction than under traditional procurement.” This is because when a PPP is negotiated it “focuses on the whole life cost of the project, not simply on its initial construction cost. It identifies the long-term cost and assesses the sustainability of the project.”

Grupo Hermes has also been the ideal partnership for this enterprise… Without such a partnership it is unlikely that the local Yucatán government would have been able to develop
a museum to this high
standard and quality

For the Yucatán government, the partnership could not have been better. The museum is already a hit, and laid the foundations for similar enterprises. The best plan to build more PPP schemes in Yucatán will definitely be to follow the example of the optimal performance of the work with which the state currently has the Great Museum of the Mayan World, thus being the first of its kind in the state as the importance of the work done.

Grupo Hermes has also been the ideal partnership for this enterprise. Since it won the concession in 2011 – after an international bidding process – the company has committed over $58.3m, and will continue to manage the museum for the next 20 years. Without such a partnership it is unlikely that the local Yucatán government would have been able to develop a museum to this high standard and quality.

While many other countries have looked to the PPP model in order to develop crucial infrastructure projects such as this, the care Grupo Hermes has dedicated to the development of the museum is unique to this project.

The building was developed with 4A Arquitectos – a Merida-based architectural firm – as it was important for Grupo Hermes to invest in local talent and labour. To that effect the group has estimated that the museum will generate close to 1,500 direct jobs and 3,100 indirect ones. Out of the construction workers alone, one in three had Mayan origins.

The museum is already a landmark for Yucatán and Mexico, which will attract international and national tourists eager to know more about the Mayan culture and heritage. Without a doubt, it is both a cultural milestone and an economic asset for the development of the state.

It has attracted visitors from around Mexico and beyond, and has been lauded as the “greatest cultural asset of the century” by the Yucatán Compass.

Crédito Real: helping lesser earners and SMEs in Mexico

Posted on by Ashton Wenborn

Although a fair few of Mexico’s macroeconomic indicators have fallen short of neighbouring nations such as Brazil and Peru of late, this is not to say that the nation is any worse equipped to embark upon an impressive spell of growth in the near future. On the contrary, recent government reforms have improved the prospects of low and middle-income sectors as well as SMEs as they find themselves subject to far more favourable conditions than before.

Far from confined to government intervention, however, a number of alternative financial institutions have taken steps to bolster the prospects of what were previously underserved – though no less crucial – components of the Mexican economy. After a string of positive reforms and a newfound focus on SMEs, Mexico now boasts a promising business climate.

Whereas Mexico’s conventional banking institutions have failed to reach many of Mexico’s lesser earners and SMEs with their inadequate branch networks, alternative institutions such as Crédito Real have put in the infrastructure to advance economic growth ahead of their conventional banking counterparts.

“Our loans are offered to these underserved segments of the population through key relationships with our distributors, established strategic alliances, and through the group loan promoters and financial advisors who service our small business loans,” says Jonathan Rangel, the company’s Investor Relations Officer. By providing an alternative means of financial service reinforced by ethics and reputation, Crédito Real strives in all it does to improve the quality of life across its target demographic and incorporate innovation into its products wherever possible.

“The purpose of Crédito Real is really to serve the underserved segments of Mexico, which here account for a large percentage of the overall population, primarily in the low and middle-income segments”, says the company’s CFO, Lorena Cardenas. “For the past 20 years, our unique products and distribution have really served to distinguish us in the financial sector here in Mexico and have opened up new opportunities to the country’s underserved individuals.”

[R]ecent government reforms have improved the prospects of low and middle-income sectors as well as SMEs

“Overall, Crédito Real offers a diversified platform of credit products with a unique distribution strategy, which is hard to replicate and represents a competitive advantage,” says Rangel.

Credit where it’s due
The company was first founded in 1993, at which time it introduced durable goods loans, which were loans made to individual consumers to finance the acquisition of “white line goods”, such as home and kitchen appliances, electronics, furniture, flooring and tiles.

“Granting loans to the low and middle-income sectors is really our core business and we are totally devoted to these customers. Whereas most of the large Mexican banks have been unable to establish a distribution framework capable of reaching the low and middle-income segments of the population, we have developed close ties with numerous third parties in reaching this demographic.

“The first product we introduced was durable goods loans in 1993, which are made through select third-party retailers for whom we provide financing programmes, to date this product represents nearly 11 percent of our current loan portfolio. In 2004 and 2007 respectively we successfully introduced payroll loans and group loans which today represent 82 percent of our loan book. Finally, in 2012 we launched small business loans and used car loans which now represent seven percent of our loan portfolio.

It is important to clarify that we are not a bank and we do not receive deposits, most of our funding comes from the debt capital markets where we are very active,” says Rangel. In 1995 the company issued debt for the first time in the Mexican market, and in 2010 went on to the international markets, issuing $210m of international notes, with a maturity of five years. Rangel continues: “Currently, our sources of funding are ample and diversified, consisting of credit lines and notes in the local and international markets. Our debt profile during the third quarter of 2013 was composed 35 percent of an international bond, 33 percent of local debt and 32 percent of bank credit lines.”

The clarity and specificity of the company’s business model has seen Crédito Real really maximise its growth and returns over the past five years in particular. The company’s loan portfolio over this period has increased at a compound annual growth rate of 30 percent, and the company’s return-on-equity has exhibited gains of over 20 percent through the same period.

The clarity and specificity of the company’s business model has seen Crédito Real really maximise its growth and returns over the past five years

“This growth has been sustained by a strict monitoring of our loans, allowing the non-performing loan ratio to be at two percent and below, highlighting the solid quality of assets. Also, the strategic alliances and the networks established with our distributors and promoters have contributed to our sustained growth,” says Rangel.

Becoming a public company
Although the company’s strategy and product portfolio has proved to be a resounding success, this is not to say that Crédito Real is an institution which rests on its laurels. “In fact, in 2012 we introduced two new products: small business loans and used car loans. We already have a diversified business platform, but we are open to new products that can help us to better serve our customers. We are also open to opportunities for inorganic growth in Mexico and other countries in Latin America,” says Rangel.

Another of Crédito Real’s recent improvements came in 2012 when the firm decided to issue an IPO and become a public company.  Despite the inevitable challenges that come with more stakeholders and the resulting transformation of the firm’s internal dynamics, Crédito Real has gone on to exhibit impressive growth since. “Becoming a public company was something very positive for us; we had strict internal controls and good corporate governance practices in place; however, with our IPO we further enhanced internal controls and enriched our corporate governance practices with independent board members. The whole process brought positive lessons for the management team.

“As far as the original founding members are concerned, they continue to commit to Crédito Real’s long-term success by accepting new partners that strengthen Crédito Real’s capitalisation in order to foster sustainable growth,” says Rangel.

Underserved market
“Despite the progress achieved by Mexico through the years on all fronts, easy access to credit and the financial system still remains open only to a highly sophisticated segment of the population and it has been one of the most challenging goals when aiming to bring wealth and quality services to the vast majority of Mexicans,” says Rangel.

“Traditional banking institutions have managed to evolve and create a very robust financial system with best-in-class rules and regulations, however, its access has been selective and has been kept at arm’s length. We still perceive a strong market potential in Mexico; according to figures from Banco de Mexico, the level of credit penetration is close to 3.5 percent in our country and is still low compared to other countries in Latin America.”

The middle and low-income segments of the population are believed to represent as much as 79 percent of Mexico’s total population

The middle and low-income segments of the population are believed to represent as much as 79 percent of Mexico’s total population, so there clearly exists a huge opportunity for companies such as Crédito Real to capitalise on. Although it will take quite some time and investment to tap into the country’s vast potential, the company remains open to opportunities in countries further afield, although for the time being Mexico remains the firm’s principal focus.

Mexico has recently been made subject of a few changes with respect to its financial system, which together place a far greater emphasis on benefiting SMEs and low and middle-income individuals. “In general, we perceive the financial reform in Mexico as something positive for the sector and for the country’s economy. The main elements of the reform are improvement in the repossession process, increase of credit availability, and higher incentives for lending to small and medium businesses,” says Rangel. The reforms, especially those with regards to SMEs, are in keeping with Crédito Real’s strategy in that both recognise SMEs to be integral in spurring national GDP growth and broader economic development. “Crédito Real represents a success story that has spanned the last 20 years, and we expect a very successful future given that we’re well positioned to take advantage of Mexico’s momentum and profitable growth pattern,” says Cardenas.

Provided that more companies such as Crédito Real recognise the opportunities to be had amid Mexico’s burgeoning low and middle-income segments, the economy will be afforded a stronger footing from which to thrive in the near future. As credit is made more readily available to the nation’s lesser paid, and incentives for SMEs are improved upon, Mexico’s macroeconomic figures are likely to see an upturn in the coming months and years ahead.

Jim Ovia: Zenith leads Nigerian change

Posted on by Ashton Wenborn

Nigeria, little over two decades ago, was in short supply of the resources and infrastructure necessary to keep pace with the rapid technological and economic change in much of the developed world. Opportunities were limited and, as a consequence, business impetus was lacking, save for a select few individuals who sought to capitalise on what were then just pockets of opportunity.

An economic overhaul and the ensuing market liberalisation in the early 1990s brought with it a wave of entrepreneurs, among them the Zenith Bank founder, Jim Ovia, who sought to inspire progressive change in what was then a sorely underdeveloped business climate. Skip forward to the present day and the country ranks alongside some of the world’s best-performing emerging markets, thanks to men like Ovia, whose actions have underpinned the many positive changes to Nigeria’s economic environment, particularly in the banking industry, where he applied his acumen and entrepreneurial resilience to positively impact the entire system. He stepped down as GMD/CEO after two decades of a very successful career that stands out as a study in leadership, change management and strategy. He has since gone on to explore new opportunities and embrace new challenges. World Finance looks back on Ovia’s career and the ways in which he has changed Nigeria’s economic and management thinking for the better.

From clerk to CEO
Ovia began his career in 1973 working as a Barclays Bank (now Union Bank) clerk. It was there that he was introduced to an industry he would later come to play a significant role in transforming. He obtained a B.Sc in Business Administration (MBA) from Southern University, Louisiana (1977) and went on to earn a master’s degree in Business Administration from the University of Louisiana in 1979. He is also an Alumnus of Harvard Business School (OPM).

Zenith Bank total assets:

Ngn 215.2bn

2004

Ngn 2.4trn

2009

One of the most crucial developments in Ovia’s early career, and one that would shape his business philosophy, was at Baton Rouge Bank and Trust Company while working part-time in 1977, where he gained experience in the use of computers. This stint, though seemingly inconsequential, sparked an appetite for technology and the realisation that it would signal a brighter future for his homeland.

Following a good few years of valuable experience in the banking industry, Ovia decided to establish a bank; one that would later turn into a global brand and a dominant player in Nigeria. Ovia was promptly granted a banking license to bring his vision to fruition, and on July 16, 1990 he and a select few others opened shop and began a revolution in the country’s overly conservative and inefficient banking industry.

Talking about his hands-on experience with Forbes Africa, he said: “I’ve worked as everything, from a junior clerical officer in a bank to a middle management trainee. I really did work my way up the ladder. I had enjoyed banking as a profession right from the outset… I worked 16 hours a day and I enjoyed every minute of it.”

In an interview with CNBC, Ovia said: “Stepping down from Zenith Bank was a very big blessing for me really, because it afforded me the opportunity to do so many other things that I couldn’t possibly do when I was CEO. Having run the bank for 20 years, really, in Africa, is quite a long time to be in one institution.” The entrepreneur’s contributions to the country’s wider development have not let up since.

Ovia began to make his contributions to the development of banking in Nigeria more pronounced when he founded Zenith Bank in 1990. Nigeria’s banking system prior to the advent of the Ovia-led Zenith Bank was characterised by queues, and lots of them, as the country’s 100 million-strong population (at the time), customarily crowded the insides of Nigeria’s precious few, ill-equipped and thinly spread banks. Ovia’s first move, therefore, was to bring ATMs to Nigeria, effectively bypassing the human traffic that clogged so many banking halls and doing away with the over-the-counter culture that reigned. “When we started Zenith in 1990, it was extremely difficult, as the necessary resources and infrastructure to do businesses, particularly banking, were not in place. There were no ATMs, no mobile phones and ICT was a rarely known concept in the business space,” he told Forbes.

Zenith Bank has greatly impacted banking (see bar chart) in Nigeria, lifting the sector from the era of over-conservatism to one of healthy conflict and dynamism, characterised by a culture of excellence and global best practices. This has been achieved through a combination of the power of vision and a skilful union of banking expertise and cutting-edge technology to create products and services that meet and anticipate customers’ expectations.

The bank blazed the trail toward digital banking in the country, scoring several firsts in the process through the deployment of ICT infrastructure to create innovative products that meet the needs of its teeming customers. The bank is demonstrably a leader in the deployment of the various channels of banking technology.

The person behind this revolution, Jim Ovia, is a man who sees far into the future and takes steps, leveraging on his excellent acuity and calculated-risk-taking skills, to crystallise any benefits from existing and future opportunities. Zenith, which by balance sheet size and other positive financials has shaped and is shaping certain critical aspects of developments in the sub-sector, is in sheer entrepreneurial energy a bank without equal, and one which has taken after its progenitor.

Zenith-Bank-Gross-Revenue-2012

Going public
The achievements of Zenith Bank highlight Jim Ovia as an accomplished banker and erudite manager of human and material resources. His capacity for leadership and eye for growth opportunities is evident in Zenith’s performance and progression on a number of parameters. During his 20 years of service as CEO, the bank witnessed tremendous growth in shareholders’ funds, from the NGN 20m minimum paid-up capital in 1990 to NGN 335bn as at December 31, 2009.

In the two decades under Ovia, the economy witnessed a wide variety of economic peaks and troughs, from heady growth to global financial crises, and Ovia led the Zenith Bank Group to demonstrate resilience irrespective of business cycles, with a strategic focus and conservative business model that has become a classical benchmark. Under Ovia’s watch, Zenith Bank went public in June 2004 and was listed on the Nigeria Stock Exchange on October 21 2004, following a highly successful IPO. The bank’s shares are freely traded on the London Stock Exchange following a listing of $850m worth of its shares at $6.80 each in a major step aimed at improving liquidity in the stock through global depository receipts.

The bank’s total assets through June 2004 to March 2009 exhibited gains of 939 percent (NGN 215.2bn to NGN 2.4trn), shareholder funds saw a 2,061 percent increase (NGN 15.6bn to NGN 338.7bn), and total deposits expanded by 830 percent (NGN 131bn to NGN 1.2trn).

Not content with spearheading changes in management, service delivery and customer service, Ovia deployed a robust IT infrastructure and a range of digital products in an effort to bring technology to the fore of Nigerian banking.

His success in deploying a digital infrastructure ignited the interest to have him replicate the same at the national and not-for-profit levels. This led him to huge involvement in ICT-related endeavours including but not limited to his being the Chairman of the Nigerian Software Development Initiative (NSDI), Chairman of the National Information Technology Advisory Council [NITAC], and a member of the Honorary International Investor Council and the Digital Bridge Institute (DBI).

Furthermore, with over 350 branches and business offices nationwide, Zenith Bank is present in all the state capitals, the Federal Capital Territory (FCT) and numerous major cities and towns in Nigeria. The bank also maintains a strong presence along the west African coast, with wholly owned subsidiaries in Accra, Ghana (Zenith Bank, Ghana) and Freetown, Sierra Leone (Zenith Bank, Sierra Leone), as well as in Europe through Zenith Bank UK and Asia through a representative office in Beijing. This is in addition to a representative office in Johannesburg (see pie charts).

The bank is seen as an institution with incredibly high standards, not just on a national level but an international one. Testimony to Ovia’s leadership qualities are a succession of excellent ratings from local and international agencies, which were given in the final full year of his service at Zenith. Standard and Poor’s rated the bank BB-, which is the highest ever rating assigned to a Nigerian bank, and Fitch Ratings awarded an AA- (national). Agusto & Co., Nigeria’s foremost rating agency, for the ninth consecutive year in 2009, rated Zenith Bank AAA, stating, “The bank is a financial institution of impeccable financial condition and overwhelming capacity to meet obligations as and when they fall due.”

In January 2009, the bank was adjudged to be the ‘Most Customer-focused Bank in Nigeria’ according to a survey conducted by KPMG. The survey, which focused predominantly on corporate customers of banks, including companies in a variety of sectors, found that customers were most satisfied with the services offered by
Zenith Bank.

Impressive performance parameters such as these are an eloquent indication of Ovia’s rare penchant for banking and his unflinching ability to mitigate existing inefficiencies in Nigeria’s testing business climate.

Zenith-Bank-Gross-Revenue-2013

Technology and philanthropy
Ovia’s proficiency for business away from banking was reasserted thanks to his foray into telecommunications with Visafone Nigeria. Again, it is to the credit of his business acumen and strategic know-how that Visafone subscribers hit a base of one million within six months of operations and boasted an active service usage across 12 states.

Ovia continues to play a leading role in the digital empowerment of Nigerian youths and is known to have pledged a great deal of support, financial and otherwise, to the backing of numerous philanthropic causes throughout his career and the pursuit, which is often rooted in technology, takes up a large chunk of his life to this day.

He has also donated a great deal of internet-enabled tools to youths in all tiers of the Nigerian education system, in addition to setting up various philanthropic organisations. He believes that by empowering Nigerian youths with technology, they will be granted access to essential tools that will help them on their way to any number of professions down the line.

In keeping with Ovia’s commitment to matters of technology, he is also the proprietor of the University of Information and Communication Technology in Delta State. Moreover, Ovia is the founder of the ICT Foundation for Youth Empowerment, which focuses on improving the socioeconomic welfare of Nigerian youths by encouraging them to embrace information and communication technology as part of their career and personal development.

“This will provide an opportunity for our future leaders. It is a mission I’m thrilled to drive, as it is a great investment in the future of my country. The first thing you learn in business is to make profit. However, how you choose to spend the profits is just as important. Philanthropy is important to me, as I derive more joy from spending mine this way. You need to give back, reach out to the larger society and less privileged,” he told Forbes.

Ovia’s focus on philanthropic causes can also be seen in the various NGOs he has contributed to, not least of which being his membership of the Tsunami Disaster Relief Committee and his position as co-ordinator of the Nigerians United To Save Niger Republic. He is also the founder and Chairman of Mankind United to Support Total Education (MUSTE), a philanthropic organisation focused on providing scholarships for low-income segments of the population. Through the MUSTE project, a select few beneficiaries have gone on to become qualified medical doctors, lawyers and engineers.

Lasting legacy
Although dispositions of this sort were becoming more common in the region, Ovia’s understanding of the need to give back to society was not, and he continues to express a keen interest and head impressive developments in the field of CSR and philanthropy to this very day.

Nigerian-GDP-and-banking-assets

In light of his impressive achievements in national and social development, the President of Nigeria made Ovia a Member of the Order of the Federal Republic in November 2000, and upgraded him to Commander of The Order of Niger in 2011 as a result of his consistent record of positive impact on his country. His other awards include the Zik Award for professional leadership in April 1999 and the honorary degree of Doctor of Science in Finance from the Lagos State University in October 2005.

“I think Nigeria is a country of tremendous opportunity and of infinite possibilities,” said Ovia to CNBC. “We have a lot of young people here, who are very talented, very well educated, who are ready to embrace technology and embrace whatever the world is doing.” Following on from Zenith’s technological prowess, Ovia hopes to demonstrate alternative channels through which technology can play a role in spurring development for Nigerian business and the country’s population at large.

An attempt to deconstruct Ovia’s achievements is a near impossible task. So great has been his contribution in turning Nigeria from bust to boom that not enough can be said of the man’s corporate and social work in a place that he was not only brought up in but later came to redefine. What can be said with some degree of certainty, however, is that Ovia’s influence in both corporate and social terms have impacted Nigeria positively on several fronts.

“We’ll need nuclear”: Lady Barbara Judge on the future of global energy | Video

Posted on by Ashton Wenborn

Nuclear power is one of the most controversial forms of energy, but it also has many merits. Lady Barbara Judge, one of the leading experts on atomic energy and the former Chairman of the UK Atomic Energy Authority, talks about just how important the energy form is, what role it plays in the global energy mix, and whether Kiev protests will spark a nuclear renaissance

World Finance: Well Lady Judge, let’s start with looking at the global energy mix, and what part does nuclear play?

Lady Barbara Judge: I believe strongly that nuclear has a role to play in the global energy mix. All countries need a bouquet of energy sources. They need oil, they need gas, they need renewable, but they definitely need nuclear, because nuclear is a base load source of energy, it goes 24/7, it goes not only when the wind is not blowing and the sun is not showing, you can have nuclear energy and it’s a very moderate price and it doesn’t gyrate. So it clearly has a place alongside other energy sources.

World Finance: Well what does nuclear energy mean for Europe?

Lady Barbara Judge: Oh I think it’s very important. No country should be relying on other countries for their energy, because all sorts of things happen. When energy has to cross national boundaries, you in your country have to worry about what’s happening in some other country. If you build a nuclear power plant in your own country, you can build it as big or as many as you want. So you have energy security, and energy independence. And one more thing: Europe is very concerned about climate change, and as we all know, nuclear does not emit carbon. So it answers all those three questions; energy security, energy independence, and climate change.

All countries need a bouquet of energy sources

World Finance: Well obviously you’ve come today to speak at the Caspian Corridor conference, so what does atomic energy mean for this region?

Lady Barbara Judge: Well it’s an interesting region, because it’s all part of the former Soviet Union, and the Soviet Union has been building and using nuclear power for a very long time. They didn’t stop, as some other countries do. And I think at this point they’re considering, many of these countries, whether they build new nuclear, whether they build small modular reactors, or whether they rely on gas.

World Finance: Well Kazakhstan is the world’s dominant uranium producer. Why is the country so well positioned to be home to a nuclear fuel bank?

Lady Barbara Judge: First of all it has a lot of uranium, and after all uranium is what’s used for nuclear fuel, and second of all it’s a huge country with a small population, so you can do a lot of things in that empty land with the uranium that’s not dangerous, that people aren’t worried about, and that makes money for the population.

World Finance: Well following on from Fukushima in Japan, Germany halted its nuclear program. Do you think this was an overreaction? 

Lady Barbara Judge: Oh totally. What’s happening in Germany is really amazing. You know that right after Fukushima Mrs. Merkel lost one election on one small conservative district, and the reaction was tremendous. So what’s happening now, the Germans are buying gas from Europe, they’re burning cheap, nasty American coal and their own coal, they’re buying nuclear from power plants in France but just along the German border, they’re burning as I say this coal, so they’re increasing their emissions, and the price of energy is going up. It ticks every wrong box, and the thing about it is, the Germans really know that. And so even the Green Party is getting a little backlash for putting the consumer in a position where the power is costing more all the time.

What’s happening in Germany is really amazing

World Finance: Could nuclear power disenfranchise us from energy monopolies?

Lady Barbara Judge: The more sources of energy you have, the better off a country is. So if nuclear has a big place as a base load energy, then you won’t have to rely so much on gas or oil, where the monopolies are at the moment.

World Finance: Well the UK has invested heavily in wind farms and hydro, so do you think we should invest in nuclear when we have committed so heavily to renewables?

Lady Barbara Judge: Absolutely, renewables do not take the place of nuclear. Indeed, renewables don’t take the place of any base load energy. As I mentioned to you, it only works when the sun shines and the wind blows, and if you’re in Scotland, that’s the example I always use, and you come home one night and it’s dark, and it’s cold, and it’s still, and you turn on the lights; no lights. So until we have good battery storage and a way to transport renewables, we’ll need nuclear.

World Finance: On a grassroots level now, and can nuclear plants create as many jobs?

Lady Barbara Judge: Oh, more jobs. In actual fact, nuclear power plants are big infrastructure projects, so they require a lot of jobs to build them, and a lot of jobs to run them. Whereas renewables do create jobs when you build them, but it doesn’t take very many people to run them. A good example is in Dounreay. In Dounreay, in our country in Scotland, we are now decommissioning that power plant, and we’re going to be on budget and on time. And the people that are most unhappy about that are the people that live around Dounreay, because they know that when the Dounreay power plant is closed, they lose jobs, their schools will go down, their cultural events will go down, all that infrastructure money which is there for the power plant will be gone. And so, interesting enough, even though Scotland is against building nuclear, the people who live around nuclear plants, they want them because they know what benefits they bring.

[R]enewables do not take the place of nuclear

World Finance: Well both Russia and Ukraine has established nuclear facilities. How have the protests in Kiev upset the supply chain, and what are the potential ramifications of the situation?

Lady Barbara Judge: Well everybody’s worried about it. Everybody’s worried about the supply of Russian gas, which not only went to the Ukraine, but to a lot of Europe. And if there’s a problem between the Russians and the Ukranians, and the Russians pull the plug as they did some years ago, it will concern the whole of Europe. In actual fact, when Russia pulled the plug on the Ukraine a number of years ago, that’s what actually started the nuclear renaissance in Europe, because we realised that we shouldn’t be dependent on any other country for our own energy.

World Finance: Lady Judge, thank you.

Lady Barbara Judge: Such a pleasure, thank you very much.

Prima AFP quickly adapts as Peru pension reforms go ahead

Posted on by Ashton Wenborn

For Peru, a country that has been enjoying rapid economic growth in recent years, the step in pension reforms is regarded as long overdue. One of the world’s fastest-growing economies, Peru’s pension industry was formed in 1992. An update of these reforms was initiated in 2012, with the intention of improving access for the many citizens that are currently without pensions, as well as aiding the many pension funds in the country, known as AFPs. World Finance spoke to Renzo Ricci, CEO at Prima AFP, one of the country’s leading private pension funds, about the changes to the regulations and how the industry has reacted.

Peru has instituted a series of reforms in the Private Pension System. Why were these reforms made?
The Private Pension System (SPP) celebrated its 20th anniversary in 2013. During its two decades of existence, the system has achieved several important goals, including allowing five million affiliates to set up their own retirement fund; contributing to economic growth through investment; generating internal savings; and developing the Peruvian capital market.

Despite this, improvements were needed to consolidate the SPP to increase coverage, given that a large percentage of the Peruvian population is not affiliated with any pension system, and to boost the efficiency of pension fund administrators to lower costs for clients. In this context, the Peruvian government passed a law to reform the SPP in July 2012, which came into effect at the end of that year.

The reforms have brought down the commissions that the AFPs charge for administration by assigning affiliates through a tender process. Additionally, the insurance premium that is covered for managing the risk of disability, survivorship and burial costs has been reduced from 1.27 percent to 1.23 percent on average due to the process to tender the right to offer a collective insurance policy for all of SPP’s affiliates. In order to align the interests of the affiliates with those of the AFP, a commission on account balances was created so that affiliates can pay a percentage based on their pension fund balance.

[A] large percentage of the Peruvian population is not affiliated with any
pension system

In the second semester of 2014, the SPP will extend its coverage by including independent workers under the age of 40. These workers will be required to contribute to the pension system. It is important to mention that a large percentage of workers is not affiliated to any pension system and as such is not saving for retirement. This is due mainly to the informality in the market. Additionally, 75 percent of senior citizens have no pension. This measure will help people have a pension by the time they reach retirement age. In the next 20 years this age bracket will represent 18 percent of Peru’s total population (see Fig. 1).

Is the SPP reform complete or does the government need to take further measures?
The process to implement the SPP reform began at the end of 2012. Although several measures have already been put into place, others are pending, including steps to centralise the processes that will generate efficiencies for the AFP, which will lead to lower costs for affiliates, and the incorporation of independent affiliates into the SPP system.

Finally, we believe that it would be more convenient if the SPP returns to a free market model that will allow the AFPs to include more people and generate more competition. In terms of investments, we believe that a reform is needed in the capital markets to reduce the costs of fund management. If the AFPs have more leeway to invest, risk-adjusted profitability will continue to gradually improve to benefit affiliates. Additionally, the limit for investing abroad should continue to rise. This will give the AFPs more investment alternatives and a greater flexibility in terms of diversifying risks for clients.

Latin America population

Has the new system changed Prima AFP?
All of the AFPs, with the exception of the AFP that won the tender, can no longer compete to affiliate the people that enter the workforce for the first time. After the tender, only one AFP can affiliate new workers, who must stay with this AFP for two years. This situation has led Prima to focus on strengthening its affiliates’ loyalty by permanently improving its value proposition and reaching affiliates through new channels. Prima has also been preparing to defend its client portfolio by improving its sales force, internal processes and commercial strategies.

With the reform, a new commission on account balances was created so that affiliates can pay a percentage based on their pension fund balance. Existing affiliates were given the option to choose this new commission or stay with the old commission, which is based on affiliates’ salaries. The affiliates who choose the new commission must pay a mixed commission for 10 years while they migrate from the fixed commission based on salaries to the commission based on the fund balance. This means that Prima now manages a client portfolio with two different commissions.

For investment management, new regulation is yet to pass aiming to expedite the approval process for new investments, grant more flexibility with derivatives and alternatives, and provide greater transparency of portfolio returns and composition. We think some of these measures will allow higher risk-adjusted returns in the future. To date, however, the reform has not had a material impact on the way the portfolios are managed.

Beyond specific changes in the regulatory chapter for investments, the reform also sought to improve alignment of fund managers by introducing a fee scheme calculated as a percentage of assets, which now coexists with the traditional scheme calculated as a percentage of a clients’ salary. Regardless, we believe that the intense level of competition and our client’s strong preference for and awareness about fund returns, warrants a strong alignment of Prima with its clients. Our motto is “be the best pension fund in Peru”, both in terms of service and investment returns, particularly with a long-term focus.

What changes in investments has the SPP Reform brought?
Several announcements have been made defining the future roadmap of investments’ regulation. These regulations have three concrete objectives: to expedite investment approvals, to provide greater flexibility, and to improve performance analysis and disclosure. Since the inception of the industry, AFPs had to ask the regulator to approve the eligibility of each investment before being able to place an order. The regulator is now planning to pass on the eligibility analysis to the AFPs, therefore expediting the investment approvals and preventing missed opportunities that are associated with very tight timelines.

More important, however, is the greater investment flexibility that the regulator has in the works, particularly referring to the use of derivatives and alternative investments. Gaining exposure to certain assets or hedging financial risks through derivatives is currently largely restricted. But this may change soon as the regulator plans to grant more flexibility.

With regards to alternative investments – private equity, infrastructure, real estate and hedge funds – limits are expected to rise dramatically from where they stand today. This move goes in line with the asset allocation of global players to alternative investments that could range from 20 to 40 percent of assets, compared to a meagre five percent of assets for Peruvian pension plans.

What infrastructure projects is Prima AFP investing in at the moment?
Infrastructure investments have been and remain a top investment priority. They have the scale to meet our investment needs, the long maturities that match well with our long investment horizons, and in many cases returns are linked to inflation, providing an excellent hedge in a market with scarcity of inflation-linked securities.

Peru ranks very well in terms of high economic growth, low inflation and strong fiscal accounts, but doesn’t stack well in infrastructure. According to the last Global Competitiveness Report from the World Bank, Peru ranks globally 111th out of 144 in terms of infrastructure quality, only similar to Uganda or Nicaragua. Therefore, we believe that on a standalone basis, investing in infrastructure has its own merits.

Recently, the government has put in place an ambitious agenda of over $10bn in infrastructure concessions, which we see as a great source for future investment opportunities. More immediately, financing transportation is more likely to take centre-stage. We expect the works in roads that will better interconnect the north, south and east of Lima, as well as granting of a concession this year to build Peru’s first underground train for a total investment of more than $5.6bn.

The so-called “Fideicomiso de Infraestructura”, or Infrastructure Investment Trust, is a vehicle created by all the AFPs to invest in the sector, particularly in what the government calls “priority projects”. Our first trust was put in place in 2010 for a total committed capital of $300m, which was later raised to $400m and virtually fully invested in 2013. Late last year we decided to launch a second trust for a total committed capital of $1bn.

What are Prima AFP’s future projects and how do they compare with competitors?
Over the last eight years, Prima AFP has been faithful to the purpose for which it was created: to lead pension fund management and reach high levels of customer service, advisory service quality and profitability. Additionally, we have strengthened the mission that guides our performance: we work today to obtain the best conditions to ensure that our affiliates have the best pension possible while keeping them permanently up-to-date on their fund’s evolution.

In 2014, we continue to improve our value proposition, to develop our Voluntary Contributions product given that we believe this constitutes a highly attractive market segment, and to strengthen our relations with independent workers under the age of 40 who are already affiliated to our AFP by advising them that they are now obliged by law to contribute to an AFP.

Also, Prima AFP will continue to strengthen its investment strategy and will improve its processes to take advantage of the changes generated by the SPP reform, which include better alternatives for investment and flexibility in terms of the use of derivative instruments. Our goal is to improve profitability for our affiliates while reducing risks to a minimum.

Canada’s pension fund TPP encourages risk-sharing

Posted on by Ashton Wenborn

Although nobody squirrelling away their income into pension funds wants to see their savings invested in risky assets, a certain level of risk is necessary in order to get the best possible return for customers. In order to avoid any serious pitfalls, managers employ stringent and methodical risk strategies.

A widely held principle is that risk management strategies must evolve and react to changes in the market. This also applies to the wider regulatory framework that the pensions systems operate in, and countries worldwide have looked at ways in which they can reform their pension systems in order to cater for the rising number of retirees.

In Canada, reforms to the pension industry have proven difficult to implement as the government has struggled to form a consensus over the issue of how to sustain the country’s pension pot. One of the country’s leading pension funds, the British Columbia Teachers’ Pension Plan (TPP), has been looking at ways it can change the way it manages risk, and is one of several Canadian public sector pension plans that have been pioneering new risk-sharing and governance arrangements.

World Finance spoke to Linda Watson, Chair of the BC Teachers’ Pension Board of Trustees, about how the changes in risk management have been implemented and why they were necessary.

Sharing risk
The TPP employs two distinct strategies to share risk between members and employers. “The TPP has shared sponsorship risks of the plan equally since 2001,” says Watson. “If an actuarial valuation indicates financial or demographic losses, the plan’s contribution rates must be increased equally for members and employers. The second strategy is that the TPP works hard to offer a fully indexed pension; however, the plan’s defined benefit pension promise extends only to the non-indexed pension. The inflation adjustments are sustainably pre-funded but they are contingent benefits. It is the plan members who bear the risks associated with funding inflation protection.”

The two approaches have been used to create a unique strategy that is different to the traditional defined-benefit and defined-contribution plans used elsewhere. “Together these features produce a financially and politically sustainable framework. Governance arrangements and supporting service organisations have been structured to reflect the risk sharing arrangements.”

British Columbia Teachers’ Pension Plan:

89,000

Members

$20bn

Total assets

$900m

Pension benefits paid out annually

The TPP was inspired to discuss changing its risk-sharing and governance arrangements towards the end of the 1990s by a desire for greater involvement from the teachers in governance issues. “At that time the TPP had an unfunded liability, but financial markets had been performing well and the unfunded liability was diminishing,” says Watson. “The teachers, represented by their union, the BC Teachers’ Federation, wanted to share in the improving financial position of their plan and to participate fully in the governance of the plan. The British Columbia government, as sole sponsor of the plan at that time, was willing to share control of the plan and was also seeking to share the plan’s financial risks. Other BC public sector pension plans (the College, Public Service and Municipal plans) were in similar situations. The key stakeholders in each of these sectors also negotiated a shared governance model with the government.”

The old way of sharing the financial risk gave the government more control than members, which led to resentment at a lack of say in the decisions of the fund. “Under the old arrangements, the government, as the sole sponsor, was responsible for any unfunded liabilities, had the sole claim on any surpluses, and had full control over the plan’s governance, administration and investment management,” says Watson. “During good times, members could come to resent government’s access to surpluses and its control over all of the decisions and operations. During bad times, taxpayers could resent the cost of addressing public sector pension plan unfunded liabilities without any assistance from the plan members. There was a need for more equal sharing of both the governance and the risk bearing.”

Coming to an agreement with the government led to the formation of two entities that would help with the running of the public sector pension plans, says Watson. “First, the government created two new corporations that could provide appropriate support for self-governing jointly trusteed pension plans. The British Columbia Investment Management Corporation (bcIMC) and the BC Pension Corporation were formed to serve the Teachers’, College, Public Service and Municipal pension plans.

“The government also provided a legislative framework within which the stakeholders of each public sector pension plan could negotiate new joint governance arrangements. Each of the province’s large public sector plans was given the option of staying with the status quo, or shifting to new governance and sponsorship arrangements.”

Watson adds that each of the stakeholders had to agree to the new governance structure before it was implemented. “For any sector wanting to move to new pension arrangements, all of the identified stakeholders in the sector had to agree on a new framework. None of the participating partners or sectors would be compelled into new arrangements that they did not support. The government also agreed to fulfil its responsibilities under the old governance arrangements, and also to exercise its claims on surpluses, before transitioning to joint governance. For the TPP, this meant that the government addressed the TPP’s unfunded liability before transferring responsibility for a fully funded plan to a new board of trustees.”

Good for the community
The new framework provides more value to members in the form of increased savings, meaning a more secure retirement compared to those without a pension.

[A] certain level of risk is necessary in order to get the best possible return
for customers

The income also benefits the wider community. According to a recent economic impact study, public sector pension plans in British Columbia tend to offer benefits to the whole of the Canadian economy and communities, as well as individual plan members. This is because they increase domestic investment, while also ensuring the country has more investment capital. Another advantage is that plan members are better prepared for their retirements so do not rely on government programmes that supplement low incomes, and self-funded plans do not rely on future or previous generations to sustain them. In fact, investment returns fund 80 percent of the pension benefits paid to plan members.

Investment decisions have evolved from the new governance arrangements so that they are free from the political constrictions of before, says Watson, as well as encouraging more responsible investment practices. “The inclusion of an investment management corporation in the new governance model was intended to ensure that plan investment decisions are made independently and free from political influence.”

Watson says that the key features of the Teacher’s Pension Plan strategy are threefold – strong governance, an exemplary fiduciary role, and responsible investing. She says that well-managed and well-funded defined-benefit public sector plans are sustainable in British Columbia, as they have a proven track record of being able to endure challenging economic times, in part due to the sharing of risk in the joint trusteeship. The responsible investing strategy places particular emphasis on environmental, social and governance concerns being factored into investment decisions in order to manage risk, protect capital, and generate long-term value for the pension fund.

“The Teachers’ Pension Board of Trustees has maintained an emphasis on responsible investing, and encouraged bcIMC to make responsible investment considerations part of all of its investment and risk management decisions,” says Watson. “The board has also shifted asset allocations gradually to a more global exposure, and toward less liquid asset classes such as real estate, infrastructure, and private equities. We take a proactive approach to assess innovative investment ideas, while also ensuring that strong investment performance and financial growth are achieved through diversification.”

The bcIMC, which manages the assets of 40 institutional clients, now has a global portfolio of more than $100bn, and is one of Canada’s largest institutional investors within capital markets.

Watson says that since the changes to the TPP were implemented, all the key stakeholders have remained very supportive of the joint trusteeship. This is due in part to the very low management expenses, while the service to both employers and members has greatly improved. The success of the TPP, along with the other BC public sector pension plans, has even led Moody’s Investor Services to cite British Columbia’s public sector pension plans as one of the positive factors that support the province’s AAA credit rating.

Thai investment down the plughole as conflict ensues

Posted on by Ashton Wenborn

The seemingly continuous political turmoil in Thailand is seriously harming the country’s ability to attract foreign investment into a series of major projects. In particular, investors from Japan have begun to look elsewhere, as protests against the current regime become increasingly vocal.

While Thailand has never enjoyed a particularly stable political landscape, the last few months of standoffs between Prime Minister Yingluck Shinawatra and opposition protestors has led to many investors deciding they’ve had enough. The country has seen nine coups since 1946, with recent years seeing increasing unrest. Former Prime Minister Thaksin Shinawatra, the brother of the current PM, has been in exile since being overthrown by a military coup in 2006 after abusing his position over the purchase of land.

In January it was announced that foreign investors had withdrawn as much as $3bn from Thai stocks since last October, Japanese businesses particular turning their backs on the country. Japan’s ambassador to Thailand, Shigekazu Sato, said in December that that his country was increasingly concerned about the situation. “As the largest foreign investor in the country with a big Japanese community living here, we wish for all parties concerned to resolve the conflicts in a peaceful and democratic manner within the framework of the constitution.”

Projects worth as much as $15bn have now been halted in the country as a result of the political situation

Projects worth as much as $15bn have now been halted in the country as a result of the political situation. The standoff between the government and protestors has reportedly prevented Thailand’s Board of Investment from meeting for a number of months, leading to investors withdrawing their money from as many as 400 projects, many of which are much needed improvements to infrastructure.

Instead, nearby countries like Indonesia are seeing an influx of investment. According to Sucorinvest Asset Management fund manager Jemmy Paul, this is especially evident with Japanese businesses that have operations in Thailand. “We have already heard that some investors are considering moving their business to Indonesia from Thailand,” he told Bloomberg.

The need to end the situation is becoming even starker, with the affect of the protests spreading beyond Bangkok and into the manufacturing bases across the country. Setsuo Iuchi, the South and Southeast Asia representative of Japan’s investment agency Asia for Jetro, told the Financial Times the economy would slow even further unless the crisis is brought to an end. “Before, this kind of situation didn’t affect investment because it was short and only in Bangkok. But the growth rate and pace of investment will be affected if the situation is prolonged.”

AFP Capital takes pension planning online

Posted on by Ashton Wenborn

AFP Capital, a company with almost 30 years in the pension market, has a clear mission – to help shape its affiliates’ future. The firm belongs to SURA Asset Management, which is a Latin American company with pension, insurance, mutual fund, and stock businesses in Chile. With more than 1.3 million affiliates and $32.3bn in AUM (as of September 2013), AFP Capital ranks third among Chile’s pension fund managers.

Regarding its direction, General Manager, Eduardo Vildósola, said: “Our commitment is to build a long-term relationship with our affiliates in order to guide them in achieving their ‘number’ along their life cycle. This ‘number’ is the total savings reached along their working life, [which is] intended to finance their pension.”

During 2013, AFP Capital was especially focused on its brand promise: to be savings advisors to its customers, which, for a company strongly focused on providing the best possible service, means building the best pension for each individual case. Accordingly, the company has focused on improving the empowerment of its customers, that is to say, educating them and providing as much information as possible in a simple and clear way, so as to gain their trust and loyalty for a long period of time.

Setting the industry standard
“As results from pension saving schemes will be seen 25 or 30 years after the policy is formed, the pension fund industry employs long-term cycles. Therefore, making decisions promptly is critical, and at AFP Capital we are well aware of this, so we want to help our customers from their first contributions onwards,” says Vildósola.

“In order to deliver the highest and most tangible value to our affiliates, AFP Capital decided to innovate and create the Pension Scanner, which is an online tool intended to both inform our affiliates and promote voluntary savings. The Pension Scanner provides a clear picture of each customer; emphasises the importance of completing their monthly contributions; provides them with tools to do so, and in case of pension contribution gaps promotes voluntary savings to cover them,” says the general manager.

“In just three months since its launch (October, 2013), about 400,000 customers experienced their customised Pension Scan and more than one thousand of them contracted a voluntary pension plan.”

“Investment performance, service and efficiency are the three basic pillars of our company, but we believe that in order to become a reference for the industry and to reach a leading position, differentiation should be our fourth pillar. This can be achieved through pension education by means of a tool like our Pension Scanner and our brand promise – to be savings advisors,” adds Vildósola.

“By 2014, AFP Capital plans to release a new version of our Pension Scanner in different technological platforms, fully integrated into the DNA of the company. AFP Capital has been a pioneer in creating a tool like this, through a simple language and clear message that educates customers. We know it’s a long-term task, but we are committed to this path.”

The system in Chile
The Chilean pension system, in place since 1981, is based on three pillars. The core pillar is the contributory pillar, composed mainly of mandatory savings based on personal effort (10 percent of gross income with a cap of approximately $3,100). Until 2011, only dependent workers had an obligation to contribute, but since 2012, the self-employed – 1.5 million people – have been gradually added, albeit under different conditions.

Six pension fund managers in the Chilean market have total AUM from mandatory savings to the amount of approximately $145bn

Six pension fund managers in the Chilean market have total AUM from mandatory savings to the amount of approximately $145bn, allocated into five types of funds (called multi-funds), which are divided by risk, and among which affiliates can freely assign their contributions. This free choice is gradually restricted in favour of the less risky funds as people approach their retirement age.

The second pillar is the solidarity pillar, which considers state aid for low-income affiliates who fail to obtain some kind of pension or whose pensions are inadequate to cover their basic needs. And the third pillar is the voluntary savings pillar, intended for people to freely assign part of their income to increase the self-financed mandatory pension or retire early.

A discussion is currently being held in Chile after the government announced a plan to reform the pension system. Increased life expectancy, rising individual contribution rates and retirement age are among the main factors considered in the reform.

“In general, we estimate that Chile has to move on to a 16 percent individual contribution rate, which would be in line with the OECD average rate, and there must be a mandatory and voluntary component,” says Vildósola.

If this scheme were to be implemented, a particular challenge would be the retirement age of women (at 60, five years earlier than men), who have smaller pensions because of several factors: mainly more pension contribution gaps, better life expectancy, and on average lower incomes.

In this regard, AFP Capital has publicly promoted the idea to include these topics in the public-private agenda, in order to responsibly address them. Consequently, AFP Capital does not rule out any of the alternatives proposed as solutions, including those by the OECD, the IMF and the IDB, suggesting the increase of retirement age and individual capitalisation.

“More importantly, we insist on the assessment of mechanisms intended to strengthen voluntary savings, mainly group Voluntary Pension Savings (APV), which is intended for low-income workers and have not been successful because of the lack of appropriate incentives. This sector is less protected and, at the end of the day, it can become a state burden through the solidarity pillar. Meanwhile, for the high income affiliates, the path is clear: make the voluntary savings pillar grow,” says Vildósola.

the effects of pension fund systems on a country’s Gdp

The recent study ‘Contribution of the Private Pension System to Economic Development in Latin America; experiences of Colombia, Mexico, Chile and Peru’, commissioned to leading economists of the region by SURA Asset Management, presented revealing statistics on the impact of implementing the individual capitalisation pension system on the GDP of these countries.

According to the conclusions released in a book under the same name, while the impact of the individual capitalisation system is positive in all of the countries analysed, there are differences that can be explained by: the design of the pension system; the individual capitalisation system and its transition; the macroeconomic environment; the improvement of regulation; and labour market characteristics, among others.

Andrés Castro, CEO of SURA Asset Management, said the study confirms that, “there is a virtuous circle between pension systems and the development of the economies in which they are embedded.”

In the case of Chile, the research determined that the implementation of an individual capitalisation pension system has had a positive impact of 8.55 percent and 8.08 percent on Chile’s GDP, considering the percentage of the GDP growth amounts to 4.58 percent annually from 1981 to 2011 (see Fig 1).

GDP-growth-rate-of-Latin-American-countries

After the creation of the individual capitalisation system, there has been a significant increase in national savings, reaching levels of around 25 percent of GDP, well above the historical figures (around 15 percent). Between 1981 and 2012, the flow of mandatory pension savings averaged 4.86 percent of GDP, and the reform implied an increase in total savings of 3.11 percent of GDP.

Regarding other countries, the highest GDP growth rates driven by the implementation of the pension system were in Mexico (12.9 percent), followed by Colombia (12.75 percent), and Peru (6.22 percent). It should be noted that there are some methodological differences that prevent comparing these results strictly with those of Chile, but they provide orders of magnitude.

The study sought to be a contribution to the debate through a quantitative assessment of the macroeconomic effects of pension reform in each country. In order to do that, the impact of the creation of individual capitalisation systems on the growth rate and GDP level was estimated through four main channels: savings and investment, employment level, employment structure and labour productivity, which jointly, with the development and efficiency of the capital market, positively impact the total-factor productivity.

Afore XXI Banorte leads Mexico’s pension fund system

Posted on by Ashton Wenborn

Mexico’s compulsory pension system started to change in the 1990s. Although the country still had a relatively young population at the time, the rapid growth of the ageing population was starting to strain the original pay-as-you-go system. That system was deemed unsustainable in the long run, and in 1997 Mexico decided to implement a new defined contribution system with individual accounts managed by private fund managers.

Since its creation in 1997, Mexico’s Compulsory Pension Fund System (known locally as ‘Afores’) has gone through various development phases and, as of December 2013, has $157bn of assets under management (AUM), representing 13 percent of Mexico’s GDP (see Fig.1), and is growing more than $12bn per annum. The system has been continuously transformed over the past 16 years in an attempt to adapt to the country’s changing environment and to the global financial landscape.

Mexican-pension-fund-system
Source: Afore XXI Banorte

The scope of the original defined contribution system, for instance, has expanded beyond private company workers to encompass federal government employees. This has helped increase the number of accounts managed by the system to almost 51 million.

Likewise, investment regulation has had to adapt to the growth in AUM and to the development of the Mexican financial markets. In the early years of the system, virtually 100 percent of the funds were invested in domestic short- and medium-term government securities in one type of portfolio, regardless of the workers’ age.

Now, each of the Afores has four compulsory portfolios with a differentiated investment regime tied to the age of the worker. These portfolios have a large variety of domestic and foreign securities, including structured investments, and the proportion of Mexican government securities has fallen to around 50 percent.

The changing economic environment has created challenges for the Afore market participants. Fund managers have faced a highly competitive market for workers’ individual accounts, and have had to implement different strategies to achieve market share and efficiency.

The number and size of players has changed over the years, and it currently stands at 12 administrators. The recent market consolidation has been driven by falling fees and the search for economies of scale. Afore XXI Banorte has been the main participant in this process, and has consolidated the portfolios of five Afores in the last four years.

Market leader
Afore XXI Banorte is the main player in the Afore market. Since March 2013, with the acquisition of Afore BBVA Bancomer, Afore XXI Banorte became the largest pension fund manager in the country. As of the end of last year, Afore XXI Banorte managed more than 17 million individual accounts and AUM of $42bn, 26 percent of assets managed by the system. This achievement is the result of a carefully planned strategy by Afore XXI Banorte to become the best Afore in Mexico.

Afore XXI and Afore Banorte merged their operations in December of 2011, with the aim of creating a more efficient company. The resulting merger allowed the Afore to reduce the commissions charged to its customers and to improve its competitive position in the market. The combined entity has further benefited from the expertise of its two shareholders, the Mexican Social Security Institute (IMSS), and Grupo Financiero Banorte (GFNorte), the third-largest financial group in Mexico.

Afore XXI Banorte

17m

Individual accounts managed

$42bn

Assets under management

The Afore BBVA Bancomer acquisition, aside from creating the largest pension fund in Mexico, which is also managed entirely by Mexicans, delivered immediate and tangible benefits to the stakeholders. After completing the acquisition, Afore XXI Banorte further reduced its commissions to the lowest level among the private pension fund managers in the Afore system (currently 1.07 percent annually), benefitting more than 17 million account holders.

The new Afore XXI Banorte is the result of the combination of three of the most important Afore participants in the country. It has chosen the best practices of each of its constituents and has increased the synergies that started with the merger of Afore XXI and Afore Banorte. The Afore is already the largest, most efficient private participant with the lowest commission, but its aim is also to offer the highest levels of service and to become the premier investment manager.

Investment philosophy
Afore XXI Banorte has the best and most complete investment team in the Afore system. It leads the industry in the implementation of best market practices and internal compliance systems. It is also a leader in technological innovation, and has successfully implemented state-of-the-art technology to make the investment process more robust.

The Afore uses technology developed by Murex, a French technology platform, that allows real time processing and monitoring of all the portfolios, with real-time links to the risk management system (Riskwatch). This allows pre-trade simulation of every transaction, guaranteeing full portfolio compliance with each investment mandate.

On a trade-by-trade basis, compliance to a complete set of limits is verified before transactions are closed, ensuring that all mandatory limits are respected. In addition to this, a set of alarms is currently in place so if any risk gets closer to its limit, traders and the proper level of management are alerted.

Afore XXI Banorte has a strong corporate governance structure that follows international best practices. Financial risk management plays a key role in the decision making process of Afore XXI Banorte.

Afore XXI Banorte closely monitors risk at various levels, from the board of directors down to its investment committee, risk management committee, internal sub-committees and risk management unit. Financial risks are defined, identified, measured and managed, including market risk, credit risk, liquidity risk and operational risk.

An Investment and Risk Management Committee, including top managers as well as external advisors, is held on a monthly basis. This committee reviews the investment strategy, analyses key financial risk management figures, identifies the main risk drivers and takes decisions regarding the appropriate risk levels.

On a quarterly basis, a summary of the key risk drivers’ evolution is reviewed at the board of directors meetings. Additionally, given the size and importance of Afore XXI Banorte within the Afore industry, the regulator carries out a close supervision of the organisation.

Regular visits from the regulator, along with internal and external audits, complement the risk management framework in place.

All of Afore XXI Banorte’s directors, officers and employees are subject to a strict code of business conduct and ethics that establishes a set of guiding principles. These principles, together with strong ethical commitment, ensure the fulfilment of our fiduciary obligations.

New challenges
As the major market player, Afore XXI Banorte is inextricably linked to the development of the Mexican pension market. The growth of AUM and the low level of contributions are some of the most immediate challenges faced today. Regulators and market participants have to continuously adapt to the changing circumstances in order to allow the system to fulfil its pension commitments to the Mexican workers.

The investment regime already poses a challenge to the Afores. The Afores are major players in the Mexican equities and debt markets, but in many ways they have outgrown the local capital markets. The Afores are already the major institutional investors in the Mexican Stock Exchange and, together with foreign investors, are the major participants in the Mexican long-term debt market. The Afores investment regime has expanded to permit investment in foreign securities up to 20 percent of total assets. However, many participants are close to reaching this barrier.

The opening of new investment opportunities in the Mexican energy and infrastructure sectors will demand financing from many sources

Aside from foreign investment barriers, the Afores face impediments to increasing their participation in alternative investments such as real estate, infrastructure and private equity. Afores are currently allowed to invest up to 20 percent of their assets in market instruments tied to alternative investments. They have not reached this limit yet, partly due to the lack of flexibility of current investment structures.

The opening of new investment opportunities in the Mexican energy and infrastructure sectors will demand financing from many sources, and the Afores will require an investment regime flexible enough to allow them to participate in these projects.

The ultimate goal of the Mexican compulsory pension system is to provide retirement income to Mexican workers. Part of this will be achieved through the improved returns of pension funds. The other side of the equation requires large enough contributions so that workers have a large enough base to sustain them in their retirement years. This can be addressed through compulsory contributions and voluntary savings.

The Mexican government determines the level of compulsory contributions. However, the Afores have a responsibility to make the Mexican workers aware of the benefits of voluntary savings.

The current level of voluntary savings is very low; less than one percent of AUM. For many Mexicans, the Afores offer the best available investment alternative, and it is to the detriment of all participants that voluntary savings have not grown.

Afore XXI Banorte, through its varied investment alternatives and its nationwide sales coverage, is the leader in voluntary and private savings with a 90 percent market share. It will continue promoting the growth of voluntary savings, reflecting its commitment to the long-term growth and sustainability of the Mexican pension system.