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.
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.
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.”
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.
Singapore’s Overseas-Chinese Banking Corp (OCBC) has offered $5bn in a bid to take over Wing Hang Bank, in Hong Kong. The deal would be the biggest in the island since 2001, and could signify an entry for the Singapore lender into the greater Chinese market.
Wing Hang Bank is one of the last remaining family owned banks in Hong Kong, and a deal with OCBC has been on the cards for a number of months. The acquisition will be fundamental for OCBC, as Wing Hang has branches in Shenzhen and Guangzhou, and solid growth potential for expansion within Mainland China.
Wing Hang Bank is one of the last remaining family owned banks in Hong Kong, and a deal with OCBC has been on the cards for a number of months
Around six percent of the OCBC’s pre-tax earnings in 2013 came from the Greater Chinese area, a share which would have risen to over 16 percent, had it owned Wing Hang, according to internal calculations by the Singapore lender.
The last major takeover of a Hong Kong-based lender was in 2001, when DBS Holdings, another major Singapore-based player and OCBC’s main competitor, took over Dao Heng Bank for $5.3bn. Today, Dao Heng is Hong-Kong sixth largest bank by assets.
OCBC has preliminary approval from the Hong Kong Monetary Authority for the acquisition, sources related to the deal told Bloomberg. But negotiations between the two institutions have been extended twice, before major shareholders, including the founding family, agree to a sale.
“The deal ultimately will also depend on whether the other shareholders will accept this at this price or not,” OCBC CEO Samuel Tsien told reporters in Singapore. “We are of the opinion that the price to be paid is fair and equitable.”
According to Tsien, OCBC sees China as the driving force behind Asia’s economic growth, and is keen to expand in the country, rather than invest in other Southeast Asian, he told Reuters at a recent ASEAN summit.
“Wing Hang is already profitable so if there is no equity raising obviously it would add to the earnings immediately,” OCBC CHFO Darren Tan told a news conference in Singapore. “Now for an acquisition of this size, sort of a cross-country acquisition, and the price that we pay for it, three years is a reasonable return period.
In the first such increase for 17 years, Japanese Prime Minister Shinzo Abe has once again underlined his dedication to reviving the world’s third largest economy. The move, first announced in October last year, is believed to be an attempt at reducing Japan’s public debt problem which, at 240 percent of GDP, is the largest of any developed economy.
The tax increase has proven controversial, with many claiming that reduced domestic demand will harm the economy more than the increased levy will help it. There are fears that the increase could reduce consumer spending and set the economic recovery off course. The New York Times reports that yesterday saw a last-minute rush to buy essentials such as toilet roll and instant rice in anticipation of the rise.
Previous increases of consumption tax have been the death knell for former Japanese leaders
The benefits of the tax increase are much needed, however; Business Week reports that the tax increase will represent an extra 4.5trn yen ($43.6bn) in Japan’s pockets, or one percent of GDP.
Previous increases of consumption tax have been the death knell for former Japanese leaders. The man who presided over the last increase in 1997, Ryutaro Hashimoto, quickly lost favour and was no longer in office the following year.
Analysts say that Abe may yet survive the increase, but that he must decide by the end of the year whether to increase the tax yet again, to 10 percent from October 2015, as outlined by his predecessor Yoshihiko Noda. Noda’s Democratic Party laid the groundwork for the increase in 2012, shortly before the party fell from power.
Japanese banks have backed the increase. Speaking to Bloomberg, Nobuyuki Hirano, chairman of the Japanese Bankers Association said that there was a “good chance” that the Japanese economy would survive the increase and that any negative effects would be temporary.
Meanwhile, disappointing industrial output figures in February have underlined the fragility of Japan’s recovery. Industrial output fell by 2.3 percent, surprising economists who had predicted a 0.3 percent increase. Speaking to the Wall Street Journal, economist Takeshi Minami blamed heavy snowfall and bad weather, saying that the country “had quite strong figures in January, but unusually heavy snow also disrupted supply of parts”.
In a process that is expected to last up to six weeks, 814 million Indians have begun voting for a new government. The country’s election represents the world’s largest democratic election – and the biggest recorded in history. It is expected to see voters kick out the incumbent Congress Party in favour of the Hindu nationalist Bharatiya Janata Party (BJP).
Congress’s last decade as the ruling member of a coalition government has been beset by corruption scandals and criticisms of indecision. When the party returned to power after an eight-year absence in 2004, Congress was expected to oversee a period of record economic growth, establishing India as one of the leading global markets.
However, while growth has been relatively high, many see the last few years as a missed opportunity for India. Accusations of elitism have also beset the party, with the choice of Rahul Gandhi as its leader being seen as yet another example of the Nehru-Gandhi dynasty carving up the political landscape for itself.
[Modi] even likened the suffering of Muslims as inconsequential as that of a puppy being run over
With voters fed up with Congress, the BJP are widely believed to seize control of government. Modi is seen as the most pro-business candidate around, with his governing of the state of Gujarat’s economy widely praised. However, he is also a hugely divisive figure, especially with the country’s large Muslim community.
His failure to condemn the anti-Muslim riots of 2002 in Gujarat that saw almost over a thousand people die have made him hugely unpopular with many. The vast majority of those that died were Muslim, and Modi has done little to assuage the community’s fears that a government led by him will do much to help them in the future.
He even likened the suffering of Muslims as inconsequential as that of a puppy being run over. Despite some backtracking, the offense has stuck. There are also concerns over what a Modi-led government would do for India’s already difficult relationship with Muslim-dominated neighbour Pakistan.
Certainly India needs to reform its immensely confusing bureaucracy if it is to match up with the loft expectations of many global economic observers. Investors across the world have for a long time wanted to see India rival China as Asia’s economic powerhouse, but corruption and heavy regulations have hampered its potential for too long.
However, it remains to be seen whether the social implications of such a divisive figure as Nahendra Modi will do more harm than good.
A new lawsuit by the Libya Investment Authority (LIA) accuses French banking giant Société Générale of paying in excesses of £58m in bribes in order to secure contracts for business worth over £2bn, in the final years of Muamar Gaddafi’s regime.
LIA has brought the case to London, claiming restitution of money lost pertaining to deals completed with Soc Gen between 2007 and 2009. The French institution stands accused of defrauding its Libyan partner by setting up a series of complex derivative schemes that were unprofitable for the LIA, according to court documents seen by the Wall Street Journal.
Allegations of bribery involving foreign banks’ activities in Libya have been circulating since 2011, and a series of reports by the WSJ led to the US Securities and Exchange Commission to open an inquest into Soc Gen’s and Goldman Sachs’ activities in Libya at the end of the 2000s, as a number of international institutions rushed into the country to exploit its financial markets.
Allegations of bribery involving foreign banks’ activities in Libya have been circulating since 2011
With the new lawsuit in London, LIA are attempting to nullify deals with Soc Gen originally worth $1.8bn, that have since lost over half of their value after the political revolution toppled Gaddafi’s regime in 2011.
In court documents, LIA alleges that Soc Gen paid $58.5m to Leinada Inc, a company owned by Libyan Businessman Walid Giamhi in Panama. Giamhi is said to be a personal friend of the Gaddafi family, though his lawyer in Dubai, where he is based, told the WSJ that bribery allegations were “completely false”.
The money paid by Soc Gen to Leinada was ostensibly for advisory services relating to derivative trades the French bank undertook with LIA, the sovereign-fund claims in their court filings. IT further alleges that Leinada could not have provided the type of expertise required to assist on those deals. LIA claims that as a consequence, it suffered heavy losses in deals involving Soc Gen, and is now seeking to have the deal voided in order to recoup money paid to Leinada, as well as damages for Soc Gen’s alleged fraud.
“This claim, together with the one against Goldman Sachs that was initiated in January 2014, reflects the desire of the LIA’s new board of directors to redress previous wrongs and seek the recovery of these substantial funds as it seeks to invest and generate wealth for the people of Libya,” AbdulMagid Breish, chairman of the LIA told the FT.
“The former Libyan regime left behind many challenges in its wake. The LIA is resolved to address these challenges, and to develop a new strategy for the future. The board has embarked on a short to medium-term transformation program to strengthen the LIA and to enhance its corporate governance in accordance with best practices, enabling the institution to invest wisely for the future.”
Soc Gen has refuted any allegations of wrongdoing. “Société Générale contests the unfounded allegations in the LIA’s complaint,” a spokeswoman for the bank said in an emailed statement to Reuters.
Anglo-Swiss mining giant Glencore Xstrata has agreed a preliminary contract for access to Mauritanian railways and ports, according to reports. The move underlines the company’s desire to expand into the massive iron ore trade.
State-controlled mining company Société Nationale Industrielle et Minière, which has had a monopoly on iron ore exports from Mauritania for the last 50 years, was initially unwilling to provide access. After two years of negotiation, both sides have reached a preliminary deal worth an estimated $1bn. Talks to finalise the deal are expected to be extensive – the FT reports that tax negotiations alone could take months, because of the Mauritanian government’s involvement.
The move underlines the company’s desire to expand into the massive iron
ore trade
Almost a quarter of Mauritania’s $4bn economy comes from iron ore, and the country is eager to boost production. Mauritania is rich in resources but the presence of the Sahara desert makes access difficult to much of the country. The Mauritanian government has enacted a series of economic reforms in recent years in an attempt to attract foreign investment to update ailing infrastructure and allow the country to exploit resources deeper into the Sahara.
Glencore is seeking to build a mine in the remote region of Askaf. The access deal represents the first step towards construction, but progress will be slow in what is still an extremely underdeveloped part of the continent. Rival projects by Rio Tinto and Vale in Guinea have had similar setbacks because of the lack of infrastructure to support a massive mining operation.
The price of iron ore has slumped recently, mostly because of reduced demand from China, by far the biggest importer of iron ore. Tightening of credit in the country has meant that steel mills have not been able to buy ore in large volumes. The price of the ore hit an 18-month low earlier this month at $104.7 per tonne, reflecting a lack of worldwide demand.
Last year Glencore reported a 68 percent rise in export volumes of iron ore, for a yearly total of 33.2m mt. The company is still a relatively new player to the trade and will seek to capitalise on renewed demand as the global recovery begins to stimulate the need for steel.
BlackBerry’s recently released end of year results reveal revenue to have fallen 64 percent year-on-year and annual losses to have reached some $5.9bn, as the Canadian company still struggles to instigate a return to once impressive form. Nonetheless, BlackBerry’s results are not without a select few pockets of opportunity, and new chief executive John Chen is confident of there being emboldened financial results in the months ahead.
“The company anticipates maintaining its strong cash position and continuing to look for opportunities to streamline operations,” reads the company’s end of year financial report. “The Company is targeting break even cash flow results by the end of fiscal 2015.”
Nonetheless, BlackBerry’s results are not without a select few pockets
of opportunity
BlackBerry’s bold change of strategy under Chen has seen the ailing smartphone maker depart from its once successful hardware business and focus more so on software and services; however, the shift has not come without its sacrifices. As a result, the company has been forced to lay off thousands of staff and sell a great deal of its most impressive real estate, not least of which being its US headquarters in Irving, Texas.
The company has focused operations on its services business, with its hardware having lost ground to Apple and Android powered systems in recent years. Perhaps the biggest of BlackBerry’s stumbling blocks this past financial year was that with regards to its underwhelming Z10 sales, which are reported to have lost the company $934m in total.
Although the company’s revenue has plummeted, $976m from $2.68bn, it would appear that its prospects are beginning to improve somewhat. The company’s fourth quarter losses, ending March 1, came to $423m, a much lesser sum than many expected and a hugely positive development for the company.
Provided that BlackBerry continues on with its aggressive cost-cutting regime and extensive restructuring programme under Chen, many analysts believe that the long-suffering firm could break even or even turn a profit a year on from now.
Interest in Mexico’s natural gas has increased substantially over the last five years, due to the price increase of other traditional hydrocarbon fuels. As a result, methods of delivery have also increased. Fernando Calvillo and Manuel Calvillo from Fermaca, an established company in the country’s energy and construction sector, discuss the logistics of transporting natural gas in Mexico.
World Finance: Well Fernando, if I might start with you, Fermaca of course leads the way in terms of the transportation of natural gas, but why is this infrastructure so important for Mexico?
Fernando Calvillo: Today, if you see Mexico, it’s population is growing. We have 115m people, and we have more than 4000 km of border with the most important consumer in the world, which is the US. Obviously, the commercial relationship between out two countries is extremely important, and that way we need to obviously offer energy in order to be competitive.
So building infrastructure today and having access to the cheapest gas in the world, which is in the United States, helps us in order that we can be extremely competitive. If you see Mexico today, the population who runs the country is between 18 and 40 years, so we have an economy that is growing, and having the infrastructure behind the industrialisation of the country, the name of the game obviously is to build infrastructure, and mostly pipelines which natural gas today is the cheapest fuel on earth.
World Finance: You provide transportation to one of the key urban industrial areas in central Mexico, and you’re also building a pipeline in the north with interconnections to the United States. What’s the significance of this for the Mexican oil and gas sector?
Fernando Calvillo: One of the things is that we provide to the second largest industrial market, which is the city of Toluca, state of Mexico, and that project was in operation since 13 years ago. It was our first natural gas project as an operators and owners. The second project that we had, that actually we have now in operations, which is the Tarahumara pipeline can move up to 20 percent of the consumption of the gas of the country.
So this asset is extremely important because, in the north part of Mexico, there’s an important hub of productions of electricity, which we will be able to supply, and we have the flexibility to go and interconnect our system with very liquid hubs of natural gas with a very cheap price. So as we are an independent pipeline company, we can be importers of gas, and we can take advantage of being in that competitive fuel to Mexico.
World Finance: Well what sort of challenges did you have to overcome for this project?
We had to league with seven banks, and it was the first pipeline project to be financed by this type after the Lehman Brothers crisis
Fernando Calvillo: Putting together the financing, we did in house all the financing. We had to league with seven banks, and it was the first pipeline project to be financed by this type after the Lehman Brothers crisis. So it was a challenge to the acquisition of the rights of way, the logistics of the project, and obviously due to the security, we have problems with the security of the border of Mexico, to take care of our people. So I think those were the four challenges that we faced but, even though that happened, we had zero accidents, zero incidents, and the pipeline was in service one day before it was request our client.
World Finance: Well Manuel, Fermaca guarantees an uninterrupted supply of natural gas, how do you ensure this?
Manuel Calvillo: You know that it’s on our service, the pipeline has a reliability of 99.97 percent, so actually how we do it is that we run a state of the art operation, we have our automatisation system, which is called a SCADA system. Basically we are the only pipeline company I would say within Mexico that we have our own satellite signal, so we don’t rent from a third party. So we ensure that, by having 24/7, 365 operators in Mexico, which they are reading in front of computers all the time, we run the system live so we can know parameters like pressure, temperature, humidity of the gas, in real-time. And by doing that, we can ensure 100 percent of reliability on our systems.
World Finance: Well Fernando, of course there is rising demand for oil and power in the region, so how do you manage things like prices and shortages?
Fernando Calvillo: Unfortunately, the production of oil and gas in Mexico has been declining because our main sources of productions, obviously, they’re going down. I think our current President, President Peña Nieto, has been extremely smart, and he’s built bridges in order to pass the energy reform, which today that’s quite the name of the game, because Mexico was very close to private investment on the production of oil and gas.
Right now, the government is working on the secondary loss in order to see how this going to work, but in the case of natural gas I think we will be very eager to build different structures around the US so we can have access precisely to gas, and make our corridor an important utility for the production of electricity as my brother said, and as well what we want is to develop a set of industries all around so we can make an important industrial hub around these 400 km of pipeline that we have.
China has broken international rules on exports of rare earth materials said the World Trade Organization after it ruled in favour of the US, Europe and Japan in a dispute over China’s export restrictions on rare earth.
China imposed strict rare earth export quotas in 2010, which effectively cut exports by 40 percent to just over 30,000 tons, supposedly to curb illegal mining and reduce environmental damage. However, with the Chinese rare earth industry responsible for almost 90 percent of global output, as well as being dominated by three main producers, prices have soared as a result of the monopoly.
“China’s decision to promote its own industry and discriminate against US companies has caused US manufacturers to pay as much as three times more than what their Chinese competitors pay for the exact same rare earths,” said US Trade Rep. Michael Froman in a statement.
As such, the WTO panel found that the export taxes, quotas and bureaucracy imposed on overseas sales of the minerals artificially raised prices and created shortages for foreign buyers.
China has demonstrated the damage caused by the production of rare minerals, from mining and refining the metals to disposing of the waste
“China’s export quotas were designed to achieve industrial policy goals,” the panel said in stark comparison to Beijing’s claims that the restrictions were imposed to protect its environment.
The 17 rare earth elements in question are typically used in a variety of industries including green technology, defence systems and consumer electronics.
Throughout the case, China has demonstrated the damage caused by the production of rare minerals, from mining and refining the metals to disposing of the waste. Beijing has also shut down some of the worst offending producers, which have left large areas of soil scarred and un-usable by concentrated acids.
But the US, EU and Japan together argued that the restrictions were inconsistent with international trade law, because they distorted the market in favour of China’s domestic industry. This was apparent when the plaintiffs suggested that China had created a cost advantage for companies operating within its borders by lowering the price for domestic users, thereby inducing foreign companies to base operations in China in order to be competitive.
Whether Beijing will appeal the decision is still unclear, after a statement noted that Chinese officials are “assessing the panel report and will follow the WTO dispute settlement procedures to settle this dispute.” China now has two months to appeal the case.
In the lawsuit, filed in US District Court for the Western District of Arkansas, where Walmart is headquartered, the firm claims that Visa charged the retailer with excessive swipe fees over nearly nine years between January 2004 and November 2012. Swipe fees must be paid by the retailer to the card issuer every time a customer pays by debit or credit card.
The move follows a recent settlement between retailers, Mastercard, and Visa in December. The case drew outrage because of the sum of money the companies agreed to pay out – $5.7bn – which some retailers say is simply not enough to compensate for the damages caused. The case was also controversial because the settlement included a clause that made retailers give up their right to sue the companies in the future.
Several high-profile retailers opted out of the settlement, including Walmart, stating that the settlement did not prohibit the card networks from upping the prices in the future.
In the lawsuit Walmart asserts that Visa colluded with banks to artificially inflate the fees and that they had to raise prices to compensate for the higher charges.
“The anticompetitive conduct of Visa and the banks forced Walmart to raise retail prices paid by its customers… as a means of offsetting some of the artificially inflated interchange fees,” reads court documents, as reported by Reuters.
Retailers claim that the fees are so high because of the lack of competition between the two card network giants
Retailers claim that the fees are so high because of the lack of competition between the two card network giants. Banks must negotiate with either Visa or Mastercard to become part of the networks, and a fee is then agreed to charge retailers to process the transaction. Some of this fee then goes to the bank, but a larger portion ends up in Visa and Mastercard’s pockets.
Meanwhile, Walmart suffered in the last months of the year as bad weather helped to cut store sales by 0.4 percent. For the 2014 fiscal year, which ended at the end of January, the company reported a disappointing net income of $17bn, down six percent on the year before. More and more shoppers are buying online; Walmart says web sales grew 30 percent in 2013 to over $10bn.
Walmart has over 4,000 stores in the US but warns that some may have to close if the poor figures continue. Furthermore, the company has been streamlining their international business; in October last year Walmart closed 50 stores in Brazil and China after sluggish performances.
The Bahrain stock exchange, now the Bahrain Bourse, opened in 1989 with just under 30 listed companies. Now the exchange lists around 50 companies, and that number is on the increase. World Finance interviews Fouad Rashid, Director of Bahrain Bourse, to find out exactly what the stock exchange is, how it performed in 2013, and what future trading initiatives are being implemented
World Finance: Well Fouad, in brief, what exactly is the Bahrain Bourse?
Fouad Rashid: Bahrain Bourse is regulatory organisation, supervised by the central bank of Bahrain. There are several instruments that are listed on the exchange, including equities, we have around 45 companies that are Bahraini, and five companies non-Bahraini. On the bonds and Sukuk, we have several bonds and Sukuk, and their total size is around $3bn, plus mutual funds are listed on the exchange as well.
[T]he market is open for foreign ownership up to 100 percent, as well as there are no taxes imposed on the development, nor on capital gains
World Finance: What do you think is the value proposition of the Bahrain Bourse?
Fouad Rashid: Bahrain is known to have a solid regulatory framework. On the other hand, the market is open for foreign ownership up to 100 percent, as well as there are no taxes imposed on the development, nor on capital gains. There are several custodians, international and regional, operating in Bahrain, such as HSBC, Citi, and Standard Chartered.
World Finance: Well like many bourses in emerging markets, trading can be light, which might in turn discourage investors. How do you address this?
Fouad Rashid: Bahrain Bourse is an institutional development market. More than 40 percent of the shares listed on the exchange are owned by non-Bahrainis. We have adapted a comprehensive strategy, two years ago, to develop the exchange, all aspects of work in the exchange, and liquidity was one of the issues we had. Now since then we have implemented several initiatives, we are meant to introduce an online incentive program, specifically for retail investors to participate using the online services, and at the same time we have extended the length of the trading hours. Not only this, we are very soon going also to allow foreign brokers to become our members, provided they are licensed by their juristic bodies. They can trade remotely without having a physical presence in Bahrain.
World Finance: So how are you going about boosting listings?
Fouad Rashid: We have just reached the finalised drafting the new listing rules for small to medium size companies and once this is launched, we will expect that to happen this year, we are planning to have an extensive marketing and produce in Bahrain in the region this year, to promote the new listing and to encourage the companies to be listed on our exchange.
I can say that we have seen a pickup in the
trading activity
World Finance: Well at the end of 2013 you rolled out two initiatives to raise transaction levels, including increasing trading hours, how successful has this been?
Fouad Rashid: It’s only three months since we applied this extension, and I can say that we have seen a pickup in the trading activity. We are going to evaluate more and see what benefits that extension had on the market to take further actions.
World Finance: So how did the Bahrain Bourse perform in 2013, and what are your expectations for the new year ahead?
Fouad Rashid: Last year was a good year for us, and in all aspects of it. First the Bahrain oil share index was up by 17 percent, the value of transactions increased by 100 percent, and the value of transactions also were up by around 200 percent. This year, for the first two months, our index is up further by 10 percent, and also we are seeing more of a pickup in the trading activities.
World Finance: So finally, what other initiatives were implemented?
Fouad Rashid: On the technical side, we have signed a contract with NASDAQ OMX to replace the current trading systems to another system called X-stream, a more sophisticated trading system. On the awareness side, we have a joint annual program on investor relations. Also the last year we have introduced a program called TradeQuest. Now this program is for university students to increase their awareness on the operations of exchanges, Sukuk market, as well as providing the virtual trading. On the corporate governance aspect, we have established and implemented a comprehensive corporate governance policy. Bahrain Bourse promotes corporate governance within listed companies.
World Finance: Mark, what was your initial reaction when you heard about this scandal?
Mark Taylor: It was not a surprise! I think it’s been known for some time that there have been efforts to, not rig, but certainly affect, the 4pm fix, which is the main reference rate in the foreign exchange market, that this investigation is centred on. And as a former foreign exchange trader myself, it is part of the folklore of the market that traders do try to affect the reference rate. And in one way I suppose there is some surprise that it’s taken the Bank of England so long to investigate it.
World Finance: So how much of the blame should the BoE shoulder?
Mark Taylor: The Bank of England does have oversight of the financial markets; the London financial market is the most important foreign exchange market in the world. Most foreign exchange transactions are booked through that market. It does share some responsibility, I think that’s true.
World Finance: Let’s focus on governor Carney’s decisions of late. He’s said he’s appointing new deputy governors to the bank, he’s promised to bolster internal regulations; but do you think those changes go far enough?
Mark Taylor: I think they do in some sense, but obviously there has been a culture in the foreign exchange market and in the bank of not being forensic enough about the way the foreign exchange market conducts its business. So, letting people push through big trades just 30 seconds or 20 seconds before the reference rate is fixed in order to affect that rate, and create a situation where they can take an unfair profit from their clients? Even if there’s a whiff of that, it should have been looked at some time ago.
Mark Carney? This didn’t happen on his watch. He’s trying to change the culture of the BoE
Mark Carney has brought in two very very experienced new deputy governors: Ben Broadbent and Nemat Shafik from the International Monetary Fund, with responsibility for conducting a root and branch review of the way the bank uses market intelligence and investigates these issues. So that is a very very important issue I think, and it’s an important step forward.
It depends what will come out of that. To my mind it’s not really so much regulating the market that’s important. It’s actually taking away the incentives for people to cheat in that market. And therefore, there are one or two ways in which the 4pm reference rate is fixed, is calculated, that I would like to see change in order to take away that incentive for big traders in the market to try to influence that, and have an unfair advantage over their clients.
Mark Carney? This didn’t happen on his watch. He’s trying to change the culture of the Bank of England, so bringing in two very senior deputy governors in order to deal with that is an important step forward.
World Finance: Regulatory action is what he’s calling for, but do you think a criminal investigation against the traders who’ve been suspended is also needed?
Mark Taylor: Well I suppose one has to go back and examine exactly what are the allegations, what is it that’s being alleged? Now, there is a reference rate in the market which goes for all the major exchange rates: dollar-sterling, dollar-euro, dollar-yen. At 4pm there’s a rate that’s calculated every day by WM Reuters, a private company. And it’s calculated by taking the average exchange rate for transactions recorded by Reuters for 30 seconds before 4pm, and 30 seconds after 4pm. And that average is then called the 4pm fix.
Why that’s important is that many big institutional investors, many big clients of banks, may have lots of foreign exchange transactions going through, and they’ll just say to their bank, well, just do them at the 4pm fix. Just do them at that reference rate. So if the bank is able to affect that rate, and push it up artificially high, just for a minute or so around 4pm – they can then charge their customers a higher rate than is actually the true rate in the market.
You can put through, you know a big trade, a couple of billion dollars, 20 seconds before 4pm. That in itself is not illegal. If somebody said, why did you put through that big trade, they could say, well it’s not illegal to trade, obviously! But what is illegal is colluding. If there is evidence that banks got together, senior traders from some of the big banks got together and said you know, I’m going to put through this billion dollar trade, dollar-sterling, I’m going to buy dollars against sterling 10 seconds before 4pm. Why don’t you do the same thing, and we can both together affect the market rate?
That would certainly trigger a criminal investigation, possibly criminal charges. And that’s why important evidence to examine here is the chatroom evidence. There is some suggestion that some of these traders may have spoken to each other online in textroom chats, chatrooms at Bloomberg and Reuters. And if there is evidence recorded there of collusion deliberately to affect the market, then that is a criminal offence.
World Finance: When speaking before parliament’s treasury select committee, Carney said he had no information that suggests that anyone at the BoE condoned manipulation of the market, facilitated, or participated, in market manipulation. He also went on to to say that we have to protect the integrity of the market. But if we have the belief that traders colluded, what does that do to general market stability?
Mark Taylor: I’m sure it’s true that no one at the bank did participate or condone. I’d be very surprised if that was the case. I suppose it’s more a matter of culture. The bank should have been aware that if, you know. If you just look at the behaviour of exchange rates. Just look at what happens around 4pm: they tend to spike, or they have historically tended to jump up for 30 seconds or so around that time. So the question is then, that in itself is kind of prima facie evidence that people are trying to affect that rate.
I’m sure it’s true that no one at the bank did participate or condone. I’d be very surprised if that was the case
And I think Paul Fisher, when he was examined with governor Carney at the treasury select committee, did say something like, well it’s not the bank’s business to go out hunting down forex market riggers. Well, maybe it is. Maybe they should, where there is at least prima facie evidence of that. Where it’s part of the folklore, in a sense, of the market, that everyone knows that people are doing this. They should perhaps have investigated it, rather than seeing it as part of the culture of the market.
World Finance: How do we avoid this becoming a second Libor affair?
Mark Taylor: The Libor scandal was very important. It did strike at the perceived integrity of the financial system. And this does so similarly, it is very very worrying.
Remember the banks will be taking a profit from their institutional clients, but who are those institutional clients? They’re largely pension funds. So insofar as property is taken from pension funds, it’s taken from every one of us who have an investment, either direct or indirect, in a pension fund. And we’ll have less money to spend in our retirement! So it is vitally important to all of us.
I think just regulating the market and saying ‘you shouldn’t do this’ is very difficult, because financial markets are by their very nature large and opaque. The foreign exchange market is by definition an international global market. A $5trn a day market.
So, very very hard to regulate, because the markets will tend to find ways of circumventing that regulation. I mean, one simple way of dealing with it, or one way I personally think should be investigated, is the way the 4pm fix is conducted.
The problem with the 4pm fix is that you only have to move the exchange rate a small amount for a small period in order to affect it. So, if you can affect the average rate by a fraction of a percentage point, then that can represent millions of dollars of profit on a billion dollar trade.
I think [Carney’s] doing actually very well out of this. It depends what comes out of that investigation: the external legal investigation
Now, one simple way that ought to be investigated perhaps, is to calculate the average rate over a whole hour, rather than one minute. Because it would be very difficult in a $5trn a day financial market to affect that average over a whole hour, rather than just a minute.
Another alternative would be, if you wanted to take a short interval, you could take a minute interval, but take it a random one minute interval between 30 minutes before 4pm and 30 minutes after.
So that would then take away the incentive or the opportunity for traders to try and front-run or affect the 4pm fix. And I think that would be far more effective than just regulating against it.
World Finance: How likely do you think it is for the BoE to take your suggestion?
Mark Taylor: I don’t know; I mean they haven’t spoken to me about it. But I’m open to conversations about it, certainly!
World Finance: Now let’s talk about legacy concerns. Of course when governor Carney came into his position there was a lot of expectation placed on him. What does this whole scandal do to that expectation, and his legacy?
Mark Taylor: In a sense it wasn’t… well not in a sense, this absolutely didn’t happen on his watch. So it’s not something that, you know, he’s to be blamed for. He’s called in an external law company to investigate this, he’s appointed two new deputy governors of very very high standing in the international financial community. One ex-Goldman Sachs, one ex-International Monetary Fund, to investigate this. So I think those are very very strong and bold moves.
I think he’s doing actually very well out of this. It depends what comes out of that investigation: the external legal investigation. It depends what comes out of the internal root and branch review that Nemat Shafik will conduct. And the new measures put in place, both to shift the culture of the bank, and in order to put in place new ways of calculating the 4pm fix.
World Finance: Well I’ll be watching, thank you so much.
