Month: April 2014

Thomas Maier and Matthew Jordan-Tank on non-conventional PPPs | EBRD | Video

Posted on by Ashton Wenborn

Providing project financing for banks, industries and businesses, the European Bank for Reconstruction and Development (EBRD) invests in projects that could not attract finance on similar terms, paving the way for much needed development. Thomas Maier and Matthew Jordan-Tank talks about non-conventional PPPs, public service contracts and what makes projects credit-worthy.

World Finance: Well Thomas, let’s start with non-conventional PPPs. How do you structure these?

Thomas Maier: So, as you know, all our approaches are in sometimes difficult emerging markets, and so for us the challenge is not so much to come up with non-conventional structure than to apply best practice that we have seen elsewhere in emerging markets and mature markets, and in reality there are three elements that make a good PPP project.

We as investors look for a stable regulatory and legal environment

One is that the project itself traces an underlying demand that is long term, stable, and goes beyond political cycles. We as investors look for a stable regulatory and legal environment. And thirdly, the underlying cashflow of a project, and that is a topic we are going to discuss here in more detail, has to be stable, predictable and solid, so that both financiers and operators come in.

World Finance: And what role do institutional investors play in PPPs and project finance?

Thomas Maier: Historically, institutional investors were not very active in our region, but recently this seems to be changing. For example, last year we financed the R1 toll motorway in Slovakia, or rather refinanced that transaction, and we could attract a fair number of European institutional investors, such as insurance companies and pension funds.

Altogether about 1.2bn was raised in this market, with EBRD and KFW as anchor investors, so we do see that there is an increased interest by institutional investors, because emerging markets provide an interesting yield for these investors, provided the transactions themselves are well structured.

World Finance: Matthew, moving on to the regulatory side of things now, and how is urban transport as a sub-sector controlled?

Matthew Jordan-Tank: As you know, urban transport involves much more than just public transport. It’s also about users who drive private cars, it’s other users who are pedestrians, non-motorised transport as well. So it’s a complex environment on the street. What you’re really trying to do at the end of the day is provide a balanced approach to all those different modes of transport. So for very very large cities, what we do and what we’ve seen is that there’s a need to establish what’s known as a transport regulator, a transport agency or authority.

We’re here in London and TFL is a good example

We’re here in London and TFL is a good example of that for a very large city. In the smaller cities you can do this kind of good regulation with a transport department, but in both cases what you need is very well trained, well prepared professionals who understand the dynamics of regulatory environments in urban transport. And one of the main things we do is, with our development side of EBRD, is to really do capacity building institutional strengthening for our counterparts.

World Finance: How do public service contracts fit into all of this?

Matthew Jordan-Tank: What a PSC essentially does is establishes a two-way relationship in a balanced environment. On the one hand you have the public, the owner of the operator who will be essentially providing a service. So you’ve got an owner and a service provider and this PSC is a long term, typically a 10 year contract, that governs that relationship. What you’re trying to do in the PSC is establish the rules and regulations around the operation so that, in exchange for providing a good high quality service, the operators were remunerated sufficiently, and that’s the way to achieve sustainability, by means of this PSC instrument.

World Finance: What is the underlying revenue stream for the public sector, and how do you incorporate performance based subsidies?

Matthew Jordan-Tank: Performance based payments, really, these are public sector payments, known as subsidies typically, they are performance based in the sense that they are defined in the PSC in the formula. The formula essentially has two sources of revenue, one is from users and this is to begin with the basis of all good sustainable transportation environments. It’s when users are willing to pay a healthy amount for the service that they’re receiving.

That’s the user-based principle. The other side is, when there is a financial gap between the total cost of delivering the service and what is actually received from users, that’s where the public sector comes in with this sort of performance based subsidy payment, and that’s all defined in the PSC formula.

World Finance: And Thomas, finally, what makes a project credit-worthy?

Thomas Maier: There are additional hurdles that a project needs to meet when it is an emerging market, simply because the track record of the market itself may not be as complete as in the mature market, and the legal and regulatory framework may be less ideal than it is in certain EU countries. This is where we are coming in, as well, with additional services. For example, we help many of our public sector clients in structuring projects to a level where they become attractive to the market.

There are additional hurdles that a project needs to meet when it is an emerging market

Our own investment is important for many investors and operators, because our non performing loan ratio and infrastructure in particular is very low, which means that we generally tend to look and seek the right partners and the right projects. And lastly, we can provide local currency loans and investments, which is extremely important in infrastructure space because many of these projects only generate local currency, and therefore providing local currency financing hedges against devaluation risk.

World Finance: Thomas, Matthew, thank you.

All: Thank you.

World Bank downgrades China’s economic outlook

Posted on by Ashton Wenborn

After a “bumpy start to the year” the World Bank has downgraded its economic outlook for China – down 0.1 percent from the 7.7 percent forecast previously. The updated forecast was revealed in a new report, entitled Promoting Competitiveness and Sustainable Growth, which looks at the region’s performance thus far this year and delves into the implications of China’s “ambitious and comprehensive reform agenda.”

The country’s reform package was laid out last November and looks to improve on China’s long-term economic prospects over the next decade.

“If implemented, the reforms will have a profound impact on China’s land, labour, and capital markets, and enhance the long-term sustainability of its economic growth,” reads the report.

The ever-so-slight downgrade set out by the World Bank should be seen not as a sustained downturn but a temporary blip on the road to sustainable growth

Despite the rather long-sighted stance adopted by China, the fact remains that the country has been best characterised so far this year by unimpressive industrial performance and below par exports.

However, lacklustre stats are now beginning to pick up, and the World Bank expects industrial output to strengthen towards the middle of the year as external demand from developed countries gathers pace.

The ever-so-slight downgrade set out by the World Bank should be seen not as a sustained downturn but a temporary blip on the road to sustainable growth; an outlook best evidenced in the development bank’s China 2015 forecast, which remains at a steady 7.5 percent.

The World Bank’s 2014 reduction does, however, coincide with a reduced forecast for the wider East Asia and Pacific (EAP) region, and it’s region-wide outlook now reads 7.1 percent for both 2014 and 2015, down 0.1 percent from the rate forecast previously.

“A slower-than-expected recovery in advanced economies, a rise in global interest rates, and increased volatility in commodity prices on account of recent geo-political tensions in Eastern Europe serve as reminders that East Asia remains vulnerable to adverse global developments,” said Bert Hofman, Chief Economist of the World Bank’s East Asia and Pacific Region in a press release.

“Over the longer term, to keep growth high, developing East Asia should redouble efforts to pursue structural reforms to increase their underlying growth potential and enhance market confidence.”

Nigeria Africa’s biggest economy after GDP change

Posted on by Ashton Wenborn

Africa’s most populated country now also has its biggest economy, after Nigeria changed what is included in its GDP calculation. Figures before the change predicted Nigeria’s GDP was approximately $257.9bn, but the new calculation has almost doubled that to $509.9bn.

South Africa’s GDP was $370.3bn at the end of 2013. Most countries change what is included in GDP calculations every few years to reflect changing technologies or outputs, but Nigeria had not done so since 1990.

The new figure may liven up the fight for foreign capital between Nigeria and South Africa

The new calculation includes several sectors for the first time. Telecoms, information technology, airlines, online sales and film production are now all part of Nigeria’s GDP figures, in a move that underlines Nigeria’s commitment to more accurately track statistics, according to statistics chief Yemi Kale.

Speaking to reporters in Abuja, Kale also promised that future rebasing would occur every five years, in line with the global norm.

Kale said that the jump in the official GDP figure makes Nigeria the 26th largest economy in the world, a leap up from 33rd. It will undoubtedly fuel the intense rivalry between South Africa and Nigeria.

South Africa represents the African continent in the G20 and in the BRICS group of emerging economies but now Nigeria may question why it isn’t part of those groups too.

Analysts have criticised the figures; speaking to Reuters, Nigerian financial analyst Bismarck Rewane called the revisions a “vanity”. Rewane admitted the calculation was more accurate but cautioned against the benefits of rebasing, saying that it would mean very little for Nigeria’s population.

Economists have also suggested that Nigeria’s economy is chronically underperforming. Although the country has three times the population of South Africa, on a per-capita basis the South African economy remains stronger.

Despite the fact that GDP per capita in Nigeria rose to $2,688 last year from an estimated $1,437 in 2012, poverty and inequality have continued to widen. Infrastructure remains poor and the country has one of Africa’s most unreliable telecommunications and internet networks.

The new calculation may have one immediate benefit for Nigeria: raising the country’s profile. The new figure may liven up the fight for foreign capital between Nigeria and South Africa.

Although the country has a spotty reputation, with many still believing that the systems of governance are corrupt, Nigeria is keen to attract foreign investment to help renovate its poor transport, power and communications infrastructure.

‘Economics is a broken science’: Dr George Cooper on his new book Money, Blood and Revolution | Video

Posted on by Ashton Wenborn

Developing a modern economic model that effectively charts the world’s financial course seems like an impossible task. But that’s the call to action set forward by fund manager Dr George Cooper. In his latest book Money, Blood and Revolution he argues faulty policy is being built on even faultier economic models.

World Finance: Now you argue we have a crisis within the science of economics. Does the problem lie with broken models, or with the ineffectiveness of broken markets?

George Cooper: So, when I say economics is a broken science, what I mean is, it has become a battleground between effectively different tribal groups, all of which have got different ideas. There’s a bit of validity in each one, but they all appear to be incompatible with each other. So to fix this broken science, we need the new idea, the new paradigm shift, that lets us pick the right ideas from each of those tribes, and get them together into a single model that works.

[W]hen I say economics is a broken science, what I mean is, it has become a battleground between effectively different tribal groups, all of which have got different ideas

We’ve got a very interesting debate going on that’s just started a few weeks ago with the Bank of England publishing a new paper saying that the old model of how money is made in the economy is wrong, and we need to go to a new theory which is called endogenous money. Now they’ve published this paper, and a lot of people are getting very excited about it. And really it should be radically changing monetary policy. But it’s actually having no impact at all. So they’re changing the theories of economics all the time, but not applying them to changing policies. They’re not linking the two together.

So unless we start thinking more clearly about how the economy works, we’re not going to be able to fix the policies, because until we think more clearly about the economy, we’re not going to be able to convince people the policies need to be changed.

World Finance: Do you think that a change in the models themselves is really going to be the impetus to get governments to make those radical changes you call for?

George Cooper: If I can give you an example. At the moment we’ve got a mindset that says that the way we need to stimulate economic activity is to make it easier for entrepreneurs. So we’ve got to cut the tax rate, and make it easier for people to do business. Now that’s a reasonable argument.

But there’s another argument, that actually the way you need to stimulate entrepreneurs is actually to put more money into the pockets of their customers. So if their customers have got more money, the entrepreneurs are stimulated to try and earn that money. And there’s a different approach there.

So what I’m arguing in my new book is actually, given the current setup of the economy, what we really need to be doing is putting money into the bottom of society, producing more spending power there, and that will actually stimulate those at the top to go out and invest in order to earn that money.

World Finance: Your book is very clear to criticise existing models and sets some clear target end goals, but there’s no concise model in there. Was that intentional on your part?

George Cooper: What I set out in the book was an alternative way of thinking about the economy. Which is the start of building an alternative model.

So what I described is, I said: we need to stop thinking about a neo-classical model, trying to get as rich as possible. We need to start thinking about a Darwinian economy, where we’re actually trying to get richer than each other. And that changes the dynamics very slightly.

We need to start thinking about a Darwinian economy, where we’re actually trying to get richer than each other

The people at the top, they lose their motivation to invest. They’re at the top, and what they want is to keep the status quo in place. Economies tend to stagnate in that model.
What you need, in order to keep the economy growing, is therefore a progressive tax rate which takes some money out of the top, and puts money back into the bottom, and creates a circulatory flow of wealth around the economy.

It’s by no means a complete model, but it’s a change of mindset which makes it easier to understand the problems. It’s what the philosopher Thomas Kuhm called a paradigm shift.

World Finance: Do you have an economic forecast, or someone you think that is so clear-sighted that they could create such a model?

George Cooper: Again, if you change the mindset, I think it becomes suddenly very easy to see why these policies are going wrong; why we keep printing money, but the inflation rate keeps falling, and the growth rate doesn’t recover. Because QE – quantitative easing – is pushing money into the top of society, rather than the bottom of society.

So if we change the mode of the policy, and we say we go from monetary to Keynesian stimulus, and we cut the tax on the poorer people, and probably have to raise the tax a little bit on things like interest and dividends on capital, then we can start to deleverage the economy, and make it run in a more sustainable way.

World Finance: But doesn’t that run the risk of then creating inefficiencies in the system?

George Cooper: I think it will actually make them more efficient. Again, if we think about it the existing model, it looks like it’s an inefficiency. It looks like you’re hampering the entrepreneur. But in this new circulatory model, you realise, okay you might be hampering the entrepreneur, but you’re stimulating the customer of the entrepreneur. So actually you are helping the entrepreneur.

You need capitalism to generate the wealth and push the money up to the entrepreneurs, to encourage them to work

The analogy I use is the bicep and the tricep. They are working against each other. They’re antagonistic muscles, if you like. But no doctor would say that you only need the bicep, or you only need the tricep. You very clearly need both. And it’s the same in the economy. You need capitalism to generate the wealth and push the money up to the entrepreneurs, to encourage them to work. But then you need the state sector to help push the money back down again so that the customer of the capitalist has got the money to spend.

World Finance: Now that ties in well; of course you say in your book that democracies can really necessitate rapid economic growth, but if you look at the examples of China and Asia as a whole, don’t they contradict your assessment?

George Cooper: That’s an interesting one actually, but I don’t think it does. The model that I’m talking about is a competitive model, where we’re all trying to get richer than each other. If you start from a base level of communism, where everybody has got pretty much equal wealth (and not very much of it!) then once you taken away the communist constraints, you will get a sudden rush of entrepreneurial activity, as everybody tries to get richer than each other.

So the economy will expand very very rapidly, until a point where you get oligarchs controlling the economy. If we don’t then add in the democratic part, the recycling of the wealth, at that point the economy will stagnate.

So I don’t think what Russia did, and what China is doing now, is actually very consistent with this model. The really interesting question is whether those two countries can now make the transit to a democratic capitalism where they start to recycle some of the wealth of the oligarchs to keep the system running.

World Finance: Wouldn’t an oligarchical government that’s perhaps not on the extreme end be able to respond more quickly to changes in the market than perhaps a democratically elected government, who has to then look at issues within the Senate, or the House of Commons? Debate and then move forward with the policy?

George Cooper: You’re into an interesting question there. If we look at America and we look at Europe, it seems to me that actually the political system in both of those huge economic blocks has broken down.

We had a sort of mindset that a big super-state would work better than a lot of smaller states. I think given how the American system has become logjammed, and the European system’s become logjammed, maybe we should be asking ourselves whether actually democracy is better delivered in smaller units rather than bigger units.

World Finance: Now the eurozone is battling to get a concise plan of action forward to get economies moving. How would you rectify the situation if you were head of the ‘zone?

George Cooper: Unless the European Union can establish a mechanism to create the fiscal transfers from the wealthiest states to the poorest states, it’s going to continue to create a system of polarising wealth within the European Union where the poorer countries will get poorer relative to the richer countries. And that will create first stagnation, and then probably social unrest.

If we can’t complete the European project and create those fiscal transfers, then eventually it will probably break up. It could be many decades away, and hopefully we’ll recognise this problem and fix it before that happens. But it definitely does need fixing.

World Finance: Thank you for sharing your insight today.

George Cooper: You’re welcome, it was a pleasure. Thank you.

Special bonus video: Can we repatriate accountability from the EU?

ECB keeps record low interest rates; Lagarde warns of danger

Posted on by Ashton Wenborn

Despite eurozone inflation hitting a four-year low in March, the ECB has again reaffirmed its “unanimous commitment” to keeping its benchmark interest rate at a record low 0.25 percent. What’s more, the deposit rate will remain at zero percent, and the marginal-lending rate at 0.75 percent, with the bloc’s performance falling in line with ECB expectations.

“Incoming information confirms that the moderate recovery of the euro area economy is proceeding in line with our previous assessment. At the same time, recent information remains consistent with our expectation of a prolonged period of low inflation followed by a gradual upward movement in HICP inflation rates,” said the ECB President Mario Draghi in a press conference shortly after the announcement was made.

In his press conference Draghi refused to rule out the use of unconventional measures in boosting the bloc’s recovery

The ECB’s forecast represents a rather more optimistic view than the one shared by some analysts, who believe the threat of deflation to be looming over the bloc. Earlier figures showed that inflation had fallen to 0.5 percent through March, a far cry from the ECB’s target of two percent. The results are made to look even more disconcerting when taking into account that inflation has spent six months now in “the danger zone” – so-called by the ECB to refer to inflation below one percent.

Although the bank’s announcements were predictably tame in terms of policy changes, in his press conference Draghi refused to rule out the use of unconventional measures in boosting the bloc’s recovery. “The governing council is unanimous in its commitment to using also unconventional instruments within its mandate in order to cope effectively with risks of a too prolonged period of low inflation,” he said.

The bank’s decision comes a short few days after the IMF’s head Christine Lagarde warned of the dangers for Europe if inflation were to remain at its present low rate. “A potentially prolonged period of low inflation can suppress demand and output – and suppress growth and jobs. More monetary easing, including through unconventional measures, is needed in the euro area to raise the prospects of achieving the ECB’s price stability objective,” she told reporters in Washington DC.

When asked about Lagarde’s comments, Draghi said that the ECB valued the institution’s advice, though stressed that the viewpoints of the Governing Council and the IMF are in a sense very different.

The Candy Crush touch: from obscurity to IPO

Posted on by Ashton Wenborn

In the fast moving, boom-and-bust business of mobile app development, it’s virtually impossible to retain control over the market’s notoriously fickle consumer base. Similar to speculative investors, app users are constantly on the lookout for the next big thing – and are quick to abandon any sort of software that fails to evolve in line with the fast-paced market. In fact, some 78 percent of mobile users don’t even bother returning to a new app after using it just once. King Digital Entertainment, the firm behind global powerhouse Candy Crush Saga, has yet to experience this typical consumer exodus.

[A]pp users are constantly on the lookout for the next big thing

Having blasted from obscurity in 2011, the UK-based games developer has spent the better part of three years riding the wave of success surrounding its frustratingly simple flagship title, Candy Crush Saga, which sees users attempt to overcome obstacles by matching different coloured sweets in groups of three.

The concept itself is hardly new; permutations of this game have been on the market for over 30 years. Yet every day, 128 million players hunch over their mobile phones or tablet computers desperately trying to reach the next level of Candy Crush.

With numbers like that, it’s hardly surprising the game is now the second-highest grossing mobile app of all time, after Supercell’s Clash of Clans. According to King’s prospectus, earnings have skyrocketed from $4m in 2011 to $825m in 2013. Full year sales are currently sitting pretty at £1.8bn – helping to steer an average revenue of $2.7m per employee.

Potential investors will also no doubt salivate at the impressive dividends the firm has started handing out to its current shareholders. In the last five months, King has paid out over $500m; in February alone, the games company shelled out some $217m.

King Digital Entertainment

500m

Downloads since Candy Crush saga launch

128m

Active daily users

4%

Of users make in-game purchases

$1.8bn

2013 sales

$825m

2013 profit

$5bn

Estimated value

With surging revenue and a massive market to boot, it appears the sky is the limit for King; however, its bosses are now hungry for more. At the end of February, the company announced its intent to float on the NYSE, with an initial equity valuation of $5bn.

According to its most recent regulatory filings, the Candy Crush developer is hoping to raise up to $500m by way of an impending IPO sometime this spring. Analysts say that’s hardly ambitious. Yet would-be investors may do well to tread carefully; after all, with cautionary tales coming in at a dime a dozen, many firms are beginning to wonder whether the mobile app industry is little more than a disappointing embodiment of the quintessential boom and bust.

Barren farmland
Candy Crush Saga isn’t the first web wonder to dazzle bored commuters. When social media mega-giant Facebook turned heads in 2012 by scooping up the popular photo-sharing site Instagram for a then-unprecedented $1bn, bullish investors raced behind in an attempt to obtain similar ventures. Cue the star-crossed fate of Viddy, a mobile video-sharing service that enamoured venture capitalists and was able to raise over $36m in investor funds.

Against all odds, a poorly calculated, reactionary management style ate away at that capital. Within 12 months of its rise to power, jaded users had abandoned the app by the millions, its CEO was given the axe and a third of all staff had been laid off.

Yet no investment in the industry has proven so nightmarish as Zynga – the California-based developer behind viral online game Farmville. Boasting near-identical origins to that of Candy Crush, Farmville rose from obscurity via Facebook, where it attracted players with a free platform with which to create their own virtual farm. Then, those same users were enticed to purchase in-game additions using very real credit card details.

The genius loss leader caught on like wildfire. Within months, the gaming platform was supporting some 200 million active users – whose accumulated in-game purchases helped Zynga post revenues of £1.2bn. With that in mind, investors couldn’t wait to get a piece of the pie. So, in 2011, Zynga went public. The firm sold 100 million shares at $10 each, raking in an impressive $1bn. Google alone was said to have invested over £100m in shares – and, for several months, all was well.

Zynga set up shop in new cities across the globe, Farmville’s user base continued to expand and public shares hit a relatively impressive $15 each. However, not seven months down the road, investors were ditching those same shares for a mere $2.09, and the number of Farmville players slumped by 90 percent. Shares have since bounced back considerably, but investors may never get their money back in full.

Zynga's IPO got off to an impressive start, raking in $1bn after selling 100m shares at $10 each. However, after less than a year share prices had slumped to $2.09 and investors were left considerably out of pocket
Zynga’s headquarters in San Francisco. The company went public to huge profits, but its share price and user figures dwindled quickly

It’s not difficult to see where it all went wrong. Zynga’s worryingly rapid decay epitomises the primary issue plaguing the mobile app industry: an inability among developers to stay on top of consumer trends and evolving technologies. As the tablet and smartphone industry began to explode in 2012, social media users who played Farmville on their PCs gradually migrated over to their mobile devices, where Zynga’s flagship title wasn’t adequately supported.

By the time company bosses realised this, millions of fickle users had already moved on to the next big thing. A handful of Farmville spin-offs were swiftly dished out to competing app stores; however, none of them were able to recapture the imaginations of gamers. In the end, analysts dismissed Zynga’s turbulent fall from grace as the tech world’s biggest fail of 2012.

A one trick pony
While the cautionary tale of Zynga may appear to be a case of the extreme, the parallels it shares with King’s Candy Crush Saga are incontrovertible. Both rose to prominence on the same social media platform – and above all else, both companies have thus far proven to be one trick ponies. King has fared slightly better in attracting users onto its various satellite apps, such as the extraordinarily similar Pet Rescue Saga – which has earned some 20 million active users.

[I]t’s one thing to unleash a popular app onto the market – but quite another to make any profit out of it

Yet 75 percent of the company’s revenues continue to stem from Candy Crush alone. Consequently, it’s worth noting that last quarter there was a small but noticeable decline in the number of active users playing the company’s most lucrative title. Unlike Zynga, King is set to stage its IPO at the onset of a decline. That doesn’t bode well for investors – but it doesn’t mean the company is a total loss, either.

King does appear to be aware of the boom-and-bust nature of the mobile gaming industry, and has thus far taken a few proactive steps in order to stay relevant. Not only has that meant creating new apps, but also adding fresh blood into the mix. Last September, the company’s board appointed Hope Cochran, one of several figures that helped introduce the world to the concept of a 4G network, as King’s new CFO. It also helps that the company is still willing to bet on private capital, as it’s looking to take in just half of what Zynga raised in its 2011 sale. This proactive management style suggests that investment here may involve slightly less risk.

Competing developers are certainly experiencing no shortage of cash offers. Supercell, which was only founded three years ago, recently raised a cool $3bn – in turn helping it to work on a diverse range of titles that collectively rake in about $5m per day. Analysts reckon an IPO may also be on the cards this spring for Rovio, the Finnish design house behind viral hit Angry Birds.

App happy

$17bn

Estimated size of mobile games market in 2017

London studio Mind Candy has also been earmarked for a potential IPO. Yet if these up-and-coming tech firms are to have any hope of navigating the volatile waters that occupy today’s fast-moving mobile gaming industry, they’ve got to convince investors their money is being put to good use.

Not only must firms like King be proactive to retain their share of a demonstrably fickle market, they’ve got to diversify their catalogue to defend against the fallout of one-hit-wonders. They must also strive to create strong models for attention and retention, and encourage active daily use. New creations have got to offer a clear mental model that gives the user enough background activity that they can effectively switch off. But that’s not all it takes in order to brave the cutthroat app market.

After all, it’s one thing to unleash a popular app onto the market – but quite another to make any profit out of it. Social media app Foursquare, for example, has found it extremely difficult to make a sizeable profit, despite an estimated user base of 20 million. If King continues to cling to the hope of becoming the mobile gaming industry’s first successful public venture, company bosses have got to convince investors the studio has a viable, long-term vision for the future. New titles must constantly be churned out in order to stay relevant, and contingency plans must be in place to safeguard King from any sort of platform exodus among gamers, however unlikely.

If they can manage all that, Candy Crush Saga just may have a future yet. But until a sound business model can prove that King won’t go the same way as Zynga, would-be investors have every reason to be just as fickle as app customers.

Dr Jerome Booth: ‘the days of an emerging market-wide crisis are over’ | Video

Posted on by Ashton Wenborn

Economic theories: just how reliable are they? That’s the question that a new book – Emerging Markets in an Upside Down World – aims to answer. World Finance talks to its author, economist and entrepreneur Dr Jerome Booth, about what impact economic theory has had on our understanding of risk and emerging markets

World Finance: Well Jerome, accepted economic theory: what’s the problem with it?

Jerome Booth: Well, there’s nothing wrong with a lot of finance theory as far as it goes, but there are severe limitations. And I think the problem is in the application of theories, where the assumptions are not correct. Milton Friedman once famously said that if a theory neither has realistic assumptions, nor any ability to predict the future, then it’s perfectly useless. And one could argue that a great deal of finance theory falls into that category. And worse, it’s then used by asset managers where it shouldn’t be used.

We have this phrase ‘risk-free’, which is an abuse of the English language

One example would be the way we think about risk. Risk is a very complex thing. It’s not as simple as volatility. For a lot of investors, large permanent loss is much more important than a bit of volatility. We don’t really understand a great deal about uncertainty as opposed to risk, where you don’t know the probability distribution of returns.

We have huge prejudices. I talk a lot in my book about what I call core-periphery disease, which is the idea that the core – the developed world – affects the periphery – the emerging world – but we ignore the affect vice versa. And we can’t do that anymore, because we live in a world where it’s the emerging market central banks that hold 80 percent of global reserves over 50 percent of economic activity.

World Finance: Well how is risk gauged in emerging economies compared to our own, for example?

Jerome Booth: Well it’s often ignored in our own! We have this phrase ‘risk-free’, which is an abuse of the English language. There is no such thing as a risk-free investment.

I’m not saying that emerging markets aren’t risky. What I am saying is that risk is different for different people; unlike volatility it’s not additive. I’m also saying that it’s the prejudice that people have which is often much more important than if we perceive something as risk-free, that is a problem.

World Finance: I have heard you suggest that as the world has become more globalised, certain frontier markets provide the best opportunity for returns, yet there’s a call for greater regulation. Well surely as demand increases to saturation point, the unknown unknowns become the known unknowns, and so returns decrease?

Jerome Booth: Yes, well that’s the difference between uncertainty and risk. I’m using Frank Knight’s 1921 definition here, he talks of uncertainty as being random events where you don’t know the probability distribution. He actually talks of one-off events, ie, there isn’t a probability distribution. And you know, the investor abhors uncertainty much more than risk, which you can ensure. And arguably this is one of the key bases of Keynes’ general theory, by the way.

As you learn more, you actually turn uncertainty into risk. But again, somebody’s ability to do that may be different from somebody else’s. If I have more information than you, I may actually be taking less risk. Whereas the simple way of analysing this, which is far too common, is to assume that risk is an absolute factor – in fact measured by volatility – and it’s the same for everybody.

[I]f 50 percent is in emerging markets, then one should look at doing something like 50 percent in emerging markets

World Finance: Well could this be seen as a self-serving prophecy? For example if investment goes to emerging economies, surely they’re going to become stronger?

Jerome Booth: What I am trying to say is not that the economic activity will follow where the money goes, because of course risk also follows the money. We’ve seen that with excess leverage and the huge blowups we’ve had, particularly 2008 and since then. There’s a triple cocktail which creates some systemic risks. One is a homogenous investor base. Another is a misperception of risk. And the other one is leverage.

So what I’m saying is actually something quite different. I’m saying that one should look at economic activity on the planet, and if 50 percent is in emerging markets, then one should look at doing something like 50 percent in emerging markets.

World Finance: Well creditors in a crisis hold the shots, and for the most part they’re in emerging economies. So is this where their strength lies?

Jerome Booth: Certainly for central banks. People often think of emerging markets – this is a la my core-periphery idea – as the recipients of what we do. And in fact you’re right: the emerging markets are now massive net creditors. The average debt to GDP of emerging markets is about 25 percent. Here in the UK public plus private debt is over 500 percent, and the average for the – what I call HIDCs – heavily indebted developed countries – is about 250 percent. That is 10 times the amount of debt in the emerging market.

So this brings up whole issues about things like the international monetary system, or the lack of a system! We know from history, most recently in 1971, when the system breaks down it’s the creditor central banks, the creditor nations, that actually call the shots. And we’re denying that, and not thinking of the US as volatile and risky, or Europe as risky, because of these high levels of debt. We know from history however that they’re not going to get rid of those debts overnight. They’re almost certainly not going to do it through fiscal adjustment, which means they’re going to rob people one way or the other. And the two traditional ways of that are financial oppression, and if that fails, inflation.

World Finance: So you forecast that emerging countries will shape the world’s economy, and obviously we’ve heard of the BRIC countries and the MINT countries, so what’s next?

Jerome Booth: When Jim O’Neil came up with BRICs all those years ago, I almost immediately came up with my own, which is CEMENT. Countries in Emerging Markets Excluded by New Terminology. The logic being that you need BRICs and CEMENT – in other words it’s just a marketing gimmick.

When Jim O’Neil came up with BRICs all those years ago, I almost immediately came up with my own, which is CEMENT

There are another 60 countries, it’s not just a question of four. There are nearly 70 countries just in the emerging debt index, and they’re all very very different. Much more heterogenous than the developed countries, by the way; not least because they don’t have this common factor of massive leverage.

So I think the answer is you do lots of different ones.

World Finance: So finally, surely there are parallels between emerging markets and western economies; so are they headed for a financial crisis?

Jerome Booth: Yes and no! There will always be crises, but I think there are two types of crisis. One, a crisis that is truly global. Well fine, that can affect emerging markets. And secondly you have country-specific crises. But I think the days of an emerging market -wide crisis are over. Because without that amount of leverage, and without that uniform investor base which is highly levered that you had in the 90s and before, you don’t have anything unifying these very very heterogenous countries.

The emerging markets as I said are not without risk. I’m not saying that! I’m saying that everything is risky, and there’s a price for that risk. You’re basically being overpaid by buying emerging markets, and you’re being underpaid by buying developed countries. So there has to be a balance.

World Finance: Jerome, thank you.

Jerome Booth: Thank you, my pleasure.

China’s mini-stimulus aims at boosting growth

Posted on by Ashton Wenborn

China’s State Council has announced that it will be targeting more spending in infrastructure to boost growth, as it expressed concerns of slowing growth and a faltering economy. The spending moves include building more railways, and upgrading low-income housing, as well as a tax-relief scheme for small businesses.

China’s target for economic growth this year is 7.5 percent, marginally lower than last year’s recorded 7.7 percent, and drastically lower than what was recorded just a few years ago. Though no concrete figures were released, the measures are not likely to be anywhere near as large as the four trillion yuan packaged rolled out in 2008, which helped China buck the trend of global recession and grow over 9.2 percent the following year.

Though no concrete figures were released, the measures are not likely to be anywhere near as large as the four trillion yuan packaged rolled out in 2008

The State Council’s statement, seen by Xinhua, details plans for raising the tax threshold significantly above the current 60,000yuan level, in order to boost micro and small businesses.

The government will be prioritising expanding railways to central and western regions of the country, and over 6,600km of new lines will open this year, over a thousand more than in 2013.

And in order to keep developing the network, the government has announced the launch of a railways development fund, which will be open to social investment.

“The fund’s value is expected to reach 300bn yuan, and up to 150bn yuan of railway bonds will be issued this year,” said the State Council in a statement in Xinhua. “The government will encourage banks to fund railway construction.”

Though the measures are expected to help China sustain growth, analysts are expecting further measures to be announced in the form of looser monetary policy.

“We consider the news of the announcement the lessening of the likelihood of a resort to go-stop monetary policy, which is positive for EM risk assets,” Tim Condon, Asia Economist at ING told CNBC.

However, despite addressing the need to “further innovate the means and measures of macroeconomic control,” the State Council did not elaborate as to how this might be achieved or if any concrete measure were in the pipeline.

“It’s a bit of a rerun of what we saw last year—something less than a stimulus package and more of piecemeal measures to ensure they reach their growth target,” Mark Williams, economist at Capital Economics in London, told the WSJ.

Blythe Masters to leave JPMorgan after 27 years

Posted on by Ashton Wenborn

In the latest high-profile exit from the bank, Blythe Masters’ departure marks the end of a long career at JPMorgan, where she rose from intern to head of Global Commodities over the span of nearly three decades.

Masters, widely regarded as one of Wall Street’s most powerful women, joined JPMorgan straight out of university. Masters is credited with inventing the credit default swap during her time at the lender, the financial swap process by which banks guarantee to pay out to each other in the event of a loan default.

After noting the role that these derivatives played in the 2008 financial crisis, The Guardian named her “the woman who invented financial weapons of mass destruction”, a claim that Masters rejected as too simplistic.

The sale had originally posed the question of whether she would join Mercuria as part of the deal

Masters became the bank’s CFO in 2004. In 2006 she was named as head of the bank’s fledgling commodities arm which, after a series of high profile acquisitions, became Wall Street’s most powerful commodities desk.

The move follows the March announcement that JPMorgan would sell its commodities business to Swiss trading house Mercuria for $3.5bn. The sale comes amid tightening regulations on financial institutions which participate in commodities trading, as lawmakers try to limit potential risks to financial stability.

Masters will leave the bank after the deal is completed. The sale had originally posed the question of whether she would join Mercuria as part of the deal, but in an internal memo it was announced she would “consider future opportunities” rather than making the move.

Speaking to Bloomberg, analyst Charles Peabody said that there wouldn’t be much surprise at the announcement. “There was little reason for her to stay at JPMorgan given that her baby is being sold from underneath her,” he said.

The announcement follows a string of successive departures from JPMorgan. In March the company’s ‘heir apparent’ Michael Cavanagh, widely touted to replace CEO Jamie Dimon when the time was right, left to join private equity firm Carlyle.

BHP Billiton considers $19bn sell-off

Posted on by Ashton Wenborn

The global resources company, BHP Billiton, is considering a further overhaul of its portfolio in order to focus on five key commodities. This follows a media report suggesting that BHP is considering an AUS$20bn ($19bn) spin off of less-profitable assets.

The Australian article said that BHP Billiton is actively considering an AUS$20bn demerger of non-core aluminium, manganese, thermal coal and nickel assets, as part of an on-going divestment plan.

16 research firms said they would issue a buy rating on BHP’s stock, following
the speculation

BHP recently implemented the simplification plan under new chief executive Andrew Mackenzie, where individual asset sales are still the most likely outcome. However, as market speculation now suggests, a demerger of the non-core assets is also under consideration.

BHP said in a statement on the possible demerger, that “simplification of our portfolio is a priority and is something we have pursued for several years’’.

“In the last two years alone, the group has announced or completed divestments in Australia, the United States, Canada, South Africa and the United Kingdom, including petroleum, copper, coal, mineral sands, uranium and diamonds assets.’’

BHP has appointed Goldman Sachs to advise the company on the options, the Australian Financial Review reported.

“We continue to actively study the next phase of simplification, including structural options, but will only pursue options that maximize value for BHP Billiton shareholders,” BHP explained.

The Australian firm said focusing on iron ore, copper, coal and petroleum assets would generate stronger growth in cash flow and better returns on investment. In addition, the firm said that potash could become a major business, as it looks to improve productivity and performance.

BHP’s sell-off of businesses follows a downturn in global commodity prices, which has hit aluminium in particular. What’s more, iron ore, copper and coal continue to drop, causing concern for BHP, which generates around 73 percent of pre-tax earnings from the three resources. Copper alone brought in $7.1bn for BHP in the last six months of 2013, but with copper prices sliding below $3/lb due to a global oversupply, analysts are predicting a tough year for the industry.

In this respect, the possible sell-off has been well received as 16 research firms said they would issue a buy rating on BHP’s stock, following the speculation. This contrasts with 10 neutral and two sell ratings on a global scale.

Is economics in a state of denial?

Posted on by Ashton Wenborn

One of the greatest talents of the human race is our capacity for denial. Without the ability to deny reality, it could be hard to make progress. Yet by ditching out-dated values on efficient markets, new ideas could bring a fresh perspective and realism into solving economic disparity.

Without denial, we would have to face up to all sorts of scary and unwelcome facts, such as death, the ballooning national debt, climate change, the heat death of the universe, numerous personal failings, and so on. In a recent book, scientists Ajit Varki and Danny Brower went so far as to argue that denial was key to the development of human intelligence: without it, our brains would self-implode from too much negative information.

[M]any economists appear to have decided to do the academic equivalent of putting your fingers in your ears and humming loudly

While denial can be useful as a way to avoid anxiety or pain, it obviously has a shadow side, as when addicts deny that they have a problem, or when we refuse to accept new evidence because it clashes with our belief system. Consider for example the state of economics. The financial crisis that began in 2007 was a traumatic event for the profession – or it should have been. It certainly came as a complete surprise to nearly all economists, including institutions such as the IMF or OECD who pride themselves on their expertise at economic forecasting.

Following the crisis, there was also a widespread acknowledgement by policy makers and others that mainstream theory had been less than useful. Jean-Claude Trichet, then President of the ECB, said that “in the face of the crisis, we felt abandoned by conventional tools.” Willem Buiter – who was a member of BoEs Monetary Policy Committee from 1997 to 2000 – stated on his blog that a training in modern macroeconomics was a “severe handicap” when it came to handling the credit crunch. So how has economics reacted to the crisis?

Crisis, what crisis?
There have certainly been some positive developments, such as the George Soros-funded Institute for New Economic Thinking. But rather than engage with any kind of new thinking, many economists appear to have decided to do the academic equivalent of putting your fingers in your ears and humming loudly.

Consider for example the award of the 2013 Bank of Sweden Prize (the “economics Nobel”) to Eugene Fama for his efficient market hypothesis. This theory posits that the market is at a state of equilibrium, but is buffeted by random, independent events, to which the market instantaneously adjusts.

Markets are therefore unpredictable and impossible to beat: no investor can take advantage of a new piece of information, because as soon as it becomes available, the market has already re-priced itself accordingly. Different versions of the theory exist, ranging from strong to weak, but the basic idea remains that markets are approximately at equilibrium and price changes are effectively random.

Now, one would think that a market crash of the type experienced in 2007 and 2008 – which appears to show if nothing else a certain lack of equilibrium – would have shaken one’s belief in market efficiency. But when asked by the New Yorker in 2010 how the theory had performed, Fama replied: “I think it did quite well in this episode.” Indeed, the Economist Robert Lucas said that the reason the crisis was not predicted was because economic theory predicts that such events cannot be predicted. So everything makes sense.

[A]s some students have protested, there is little discussion in economics courses or textbooks of the actual financial crisis, which shows how the denial has continued

However, the fact that a system is unpredictable does not mean that it is efficient (snow storms are unpredictable, but no one calls them efficient). The theory is right for the wrong reasons. Markets are not at equilibrium – in the terms of complexity science, it makes more sense to see them as a process that is far from equilibrium. And price changes are not random and independent, as assumed by the theory, but highly coupled.

The efficient market hypothesis is the cornerstone of a range of financial techniques, such as the Black and Scholes model used to price options, or the Value at Risk technique for assessing risk, that failed spectacularly in the crisis for exactly these reasons. People on the whole do not think that these methods “did quite well in this episode”, to use Fama’s phrase. As one biologist remarked at a conference about economics after the crisis, “I’ll believe economists have reformed when the men behind Black and Scholes have been stripped of their Nobels.” But instead of revising efficient market theory, economists gave it another gong. Sound like denial?

General disequilibrium
Another example of how economics failed during the crisis was its reliance on Dynamic Stochastic General Equilibrium (DSGE) models. These similarly assume the existence of an underlying equilibrium around which the economy bounces, and assume that markets are self-correcting. Money is viewed as nothing more than a placeholder, so most models exclude things like banks, even though they turned out to play a rather important role during the crisis.

As Philip Mirowski points out in his book Never Let a Serious Crisis Go to Waste, DSGE modelling could “serve no useful function once the crisis hit, because it essentially denied that any such debacle could have materialised.” But these models continue to be taught and used by university economists. In contrast, as some students have protested, there is little discussion in economics courses or textbooks of the actual financial crisis, which shows how the denial has continued. Of course, many of the reasons for this denial and inertia are institutional.

Academic departments take their lead from tenured professors who built their careers around orthodox ideas, and are unlikely to drop them now. Those without tenure have their careers on the line, so are afraid of taking a risk. And most students are willing to play along, which is unsurprising given that the most common reason to sign up for economics is not to change the world, but to get a good-paying job.

As HG Wells is attributed as saying, though, “Every dogma must have its day.” It’s time for economists to come out of denial, ditch antiquated ideas about efficient markets and equilibrium, and open the field up to new ideas from areas such as complexity, network theory, and systems biology.

Caterpillar questioned by US Senate over $2.4bn unpaid taxes

Posted on by Ashton Wenborn

Caterpillar was forced to defend itself before a US Senate hearing in which it was accused of offshore tax evasion. During the panel hearing, it was revealed that a low-tax affiliate unit set up by the company in Switzerland years ago had been unchallenged by US authorities, and used to help the company avoid tax payments of up to $2.4bn.

The Senate Permanent Subcommittee on Investigations was exploring allegations laid out in a 99-page report in which details of a deal struck between the world’s largest maker of construction and mining equipment, and the Swiss tax authorities that allowed the company to pay as little as four percent tax. The arrangement applied exclusively to one of Caterpillar’s most profitable divisions, the international spare parts business. The hearing heard that Caterpillar might have moved up to $8bn in earnings to Switzerland over the years.

“The documents couldn’t be clearer, it’s a tax deal”

Profits were funnelled through a Geneva-based subsidiary, making use of elaborate transfer pricing practises. Senator Carl Levin said in the hearing that the arrangement did not appear to serve any other purpose than to avoid taxes. “The documents couldn’t be clearer, it’s a tax deal,” Levin said at the hearing. However, the Subcommittee refused to divulge whether or not it believed Caterpillar had broken US-tax law.

Caterpillar defended it’s strategy explaining it dated back to a 1999 restructuring and that it was legal and in the best interests of shareholders. Caterpillar takes very seriously its obligation to follow tax law and pay what it owes,” said Julie Legacy, Vice President of Caterpillar’s Finance Services Division, in a statement. “In fact, Caterpillar’s effective income tax rate averages about 29 percent, which is one of the highest for a US multinational manufacturing company. Caterpillar’s philosophy is that our business structure drives our tax structure. We comply with the tax laws enacted by Congress, by the states and by all of the many jurisdictions in which we conduct business.” She reiterated that position during the hearing.

“The manufacturing workers who make world-class parts, the managers who operate its parts operations, the warehouses where they are stored – none of that changed,” Levin, a Democrat, told reporters in a briefing before the hearing. “But in the fantasy land that is international tax law, tax lawyers waved a magic wand to make millions of dollars in US taxes disappear.”

Republicans in the House have seized on the opportunity to call into question what they perceive as issues with current corporate tax arrangements. “It’s an argument for broader tax reform,” Senator John McCain told the FT, questioning the top 35 percent corporate tax rate. Tax reform bills have made their way to Congress where a cut to 25 or 28 percent is being debated, in addition to a slew of measures to repatriate around $2trn in cash stashed overseas by American Companies. So far no deal has been reached on the matter.

Dr Salimo Abdula on oil production in Mozambique | Intelec Holdings | Video

Posted on by Ashton Wenborn

Mozambique is due to become an oil producing country this year, while significant progress is also expected in natural gas and coal production. Chairman of Intelec Holdings, Dr Salimo Abdula, talks about Mozambique’s many opportunities.

World Finance: Well Salimo, let’s start with how the economy is developing in your country.

Dr Salimo Abdula: Mozambique is a land of opportunity. The geographical location and population, our wealth, and the land, and hydrology are our main resource. The country’s economy is developing through the power of the land, which is ripe for agriculture, which helps to feed the families and produces exports. Also mineral resource and the new gas sector are helping to bolster the economy, along with tourism and the natural resource of the land and sea. According to the World Bank, Mozambique’s economy will grow from seven percent in 2013 to 8.5 percent in 2014-2015. An influx of foreign investment is contributing to this. Finally, we have a young population who are the driving force behind the developing of the country.

World Finance: So how is Intelec Holdings involved in this development?

Dr Salimo Abdula: Since 1996, we have invested wherever business opportunity exists, although energy and telecoms remain our core business. In the energy sector, we are helping to light Mozambique through our companies. I must name Electro Sul, Electrotec, and Aberdare Cables, the three examples. We are involved in different energy contracts of high, medium and low voltage power generation, and also we have a factory of electricity meters. In the mining sector, we were involved in five bids on behalf of our group Intelec, but we were successful in one of them. This will be our first foray into mining.

[W]e have invested wherever business opportunity exists, although energy and telecoms remain our core business

Now we are working to find a partnerships with a technical and financial capacity to work with us. Recently we invested in an agro-business project in the centre and north of Moazambique. It offers a new way for agriculture, contributing to employment, education, etc. Through one of our companies called Himbac, Intelec is involved in a project denominated MoPetCo, Mozambique Petrochemical Company, a project that intends to install and operate a petrochemical complex to produce fertilisers and chemicals, to produce also gasoline from natural gas as raw materials, to be sold in the domestic and foreign markets.

World Finance: Well Mozambique is going to become an oil producer in 2014, so what does this mean for the country?

Dr Salimo Abdula: In the sort term, it means more employment and education. It will also mean the reduction of external dependence in terms of oil and price variation in the world market. In general, however, I think it means that the country is moving towards financial independence.

World Finance: Well I think the question then that most people want answering is, in reality how safe is it invest in Mozambique?

Dr Salimo Abdula: Official statistics show that foreign investment, particularly that from 2012-2013, big projects in the oil and gas sector and mineral resources were most popular. This foreign investment show that confidence is rising for investment here. The big challenge is the legal aspect and bureaucracy. It is safe to invest in Mozambique, but I advise to do it through a local partnership, to gain available local knowledge and avoid unnecessary wasted time and money, because we have a different business culture.

World Finance: I have heard you say that Mozambique will act as a model for Africa, what did you mean by this?

Dr Salimo Abdula: In terms of peace and development. In terms of peace, we have solved our problems through dialogue. Our new challenge is to maintain our development, but dialogue remains our main weapon. In terms of development, our economy is based on agriculture, and supporting sectors such as the fishing and mineral industry. The mining and oil and gas sector is booming. The country has improved its agriculture and is still investing in this sector. It will be a mistake if we reduce investment in alternative sectors. Their potential is still unexploited, so Mozambique is acting at the right time.

The potential of oil and gas was always the same as tourism but now is the time to capitalise on it

The potential of oil and gas was always the same as tourism but now is the time to capitalise on it. We are also investing in our transport system and infrastructure, roads and railways, to enable transportation of products such as coal to the ports and the rest of the world.

World Finance: Well finally Salimo, you have been with Intelec Holdings for 17 years now, you are actually one of the founders of this company, so what’s your vision for the future?

Dr Salimo Abdula: Intelec has been involved in many investments, most of which have been successful. We pay attention to all business opportunities, even in the ones where we already based. Using this philosophy Intelec has developed a greater knowledge of the internal market in terms of continuity, we invest in the country and the rich manpower this represents.

World Finance: Salimo, thank you.

Dr Salimo Abdula: Thank you.

GM boss apologises for switch defect linked to 13 deaths

Posted on by Ashton Wenborn

At the start of April, GM executives faced a congressional hearing to answer for the company’s failure to recall faulty vehicles, despite reportedly having knowledge of the defects in question. Newly appointed chief executive Mary Barra was vocal in her criticism of the company’s actions, calling the slow response “unacceptable”, though offered very little in the way of explanation.

“When we have answers, we will be fully transparent with you, with our regulators, and with our customers,” wrote Barra in her congressional testimony. “As soon as l learned about the problem, we acted without hesitation. We told the world we had a problem that needed to be fixed. We did so because whatever mistakes were made in the past, we will not shirk from our responsibilities now and in the future. Today’s GM will do the right thing.”

The comments were made in relation to a defective ignition switch, which has so far been linked to 13 deaths. Barra admitted that the part fell short of GM’s safety specifications, though failed to adequately explain why the company took as long as 10 years to recall the affected vehicles.

[T]he switch situation would have cost 57 cents
to rectify

Company documents show that engineers put forward a series of solutions to fix the fault in 2005, though GM concluded that none amounted to “an acceptable business case.” The comments made by the company have since come under fire by investigators, who have discovered that the switch situation would have cost 57 cents to rectify.

The information that ultimately led to GM withdrawing millions of affected vehicles, 2.6m in total since February, was only revealed last month, leading many to speculate over what else the company might be hiding from the public.

In answer to concerns of this type, Barra has named 40-year company veteran Jeff Boyer as Vice President of Global Vehicle Safety. “This new role elevates and integrates our safety process under a single leader so we can set a new standard for customer safety with more rigorous accountability. If there are any obstacles in his way, Jeff has the authority to clear them. If he needs any additional resources, he will get them,” said Barra in a press statement.

“We are doing a complete investigation but I would say in general we have moved from a cost culture, after the bankruptcy, to a customer culture. We have trained thousands of people in putting the customer first.”

Crimea crisis: why putting strict sanctions on Russia is not a viable option for the EU | Video

Posted on by Ashton Wenborn

After Russian troops moved into Crimea in February, the European and American governments warned that Russia could face tough international sanctions. While America has imposed several sanctions, the EU has been slow to follow. Economist and financial journalist Liam Halligan explains why Europe needs to tread carefully and work with Russia, not against it.

World Finance: Well Liam, trade sanctions against Russia by the west. In reality, who is going to be the loser if these happen?

Liam Halligan: Well we have already had some moderate sanctions. The EU, which does 12 times more trade with Russia than the US realises, and particularly Germany realises, that sanctions against Russia would be pretty counterproductive, not just because of the huge role that Russia plays as a supplier of hydrocarbons for western Europe, of course. The trade goes way beyond oil and gas these days.

The idea of putting sanctions on Russia was really pie-in-the-sky from the beginning

Russia’s pretty much the largest retail market in Europe now, you have all the major EU countries trading heavily with Russia, Russia’s a member of the WTO, Russia’s got a seat on the UN Security Council, it’s got the longest land border of any country in the world.

The idea of putting sanctions on Russia was really pie-in-the-sky from the beginning. What we should have been doing was mediating with Russia, trying to understand their point of view, treading a lot more cautiously, intervening in domestic Ukrainian politics, and I think now several months on from what hopefully was the peak of the tension between east and west, I think most western politicians are realising now that that’s the way forward.

World Finance: Well historically, are sanctions a good way to go? We obviously saw the result from the Suez crisis was successful, but in other places like Cuba for example, five years of sanctions have not managed to bring down Castro.

Liam Halligan: Sanctions can be “successful” in that you can exert pressure on a country. If it’s a small country, and you’re a big country, working together with other big countries. If Europe is split, or Europe and America are split between them then sanctions aren’t going to work. And also, Russia isn’t a small country, it’s the sixth biggest economy in the world, and of course Russia exports lots of things that we desperately need, we have no choice. We need their oil and we need their gas.

I think most western politicians are realising now that it’s pretty counterproductive to try and target Russia with sanctions, not least because many many other countries in the world, including the Chinese, including the Brazilians, including the Indians, most of Asia of course, they think really there are two sides to this story.

World Finance: How dependent is Russia on the international economy?

Liam Halligan: Well Russia is of course an open trading nation, it’s very very much part of the global economy now. In fact, even in Soviet days, Russia was a massive supplier of oil and gas to the rest of the world, including western Europe, and you know despite the propaganda it was an extremely reliable supplier.

The difference now is that the oil and gas imperative, the demand for oil and gas is so much tighter now than it used to be, we’re now consuming almost 90mn barrels a day of oil, whereas during the Soviet days we were consuming as a global economy more like 50 or 60mn barrels a day. And of course, now the Russians can trade with the Chinese, there’s an oil pipeline as we speak up and running between Russia and China, a gas pipeline is being built. So it’s not as if the Russian’s only need to trade westward these days, they can also trade eastward.

World Finance: Well a study by the World Bank has forecast that Russia’s economy may contract up to 1.8 percent in 2014, as the dispute of course Ukraine could lead to further worsening of the consumer and business climate. So in context, how bad would that be for the country?

A trained pet could forecast Russian economics better than the World Bank

Liam Halligan: A trained pet could forecast Russian economics better than the World Bank. Even if the Russian economy slows down this year, which it obviously will, Russia isn’t growing at five or six percent, because Russia’s already not just a middle income country, it’s now a high income country, on UN definitions. Even if it grows by one or two percent, the reality is, for Russian people, the economy is still working better than it has in centuries. Pretty consistently for the last 10 or 15 years, the policy has been one of pro-privatisation, low taxation, generally business friendly policies, and certainly outward looking, trade-based policies. That’s not going to change just because the economy might slow down for a few years.

World Finance: Well finally, who do you think will be the unforeseen winners of the Ukraine crisis?

Liam Halligan: Two big diplomatic trends which have emerged from this is that Germany has reemerged for the first time in our lifetime, the first time in several generations in fact, as a major diplomatic player. Of course, Germany has been a major commercial player and the world’s biggest exporter for many many years now, but it’s always been a bit reticent about flexing its muscles diplomatically for all kinds of historic reasons.

In this conflict, Germany behind the scenes has played an enormous role, and Germany has become much closer to Russia, Germany does have a very strong trading relationship with Russia, and vice versa, and the Germans, particularly Merkel who is Russian speaking, spent a lot of time in Russia, she understands how important Russia is to the small-medium size German companies that are the source of such wealth and innovation for the German economy, she’s promoted their interests, and reined in the EU’s response.

The other thing that western Europe has inadvertently managed to do is it’s managed to push Russia and China closer together. The Chinese have remained tight-lipped for the most during this crisis, but when they have spoken out it’s been almost unequivocally in support of Russia with the Chinese saying the west needs to get over the Cold War, needs to realise this is a trading relationship between mature countries. Strangely, even America’s may.

Because even though there isn’t that much trade between America and Russia, it’s just a twelfth of the EU’s trade, there is an awful lot of foreign direct investment from America into Russia, and I think one of the reasons why Obama has pulled his punches isn’t only because he’s temperamentally quite moderate, it’s also because he’s had in his ear the likes of Boeing, the likes of Proctor and Gamble, John Deere, Pepsi, Ford, GM, all of whom have massive on the ground, productive facilities invested in in Russia, they can’t up sticks and leave, not without writing off huge losses, and they don’t want to because they see this market as extremely important.

World Finance: Liam, thank you.