2014 | World Finance

Prima AFP quickly adapts as Peru pension reforms go ahead

Posted on March 10, 2014March 7, 2014 by Ashton Wenborn

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

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

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

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

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

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

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

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

Latin America population

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Canada’s pension fund TPP encourages risk-sharing

Posted on March 10, 2014March 7, 2014 by Ashton Wenborn

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

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

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

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

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

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

British Columbia Teachers’ Pension Plan:

89,000

Members

$20bn

Total assets

$900m

Pension benefits paid out annually

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

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

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

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

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

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

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

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

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

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

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

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

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

Thai investment down the plughole as conflict ensues

Posted on March 10, 2014 by Ashton Wenborn

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

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

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

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

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

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

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

AFP Capital takes pension planning online

Posted on March 10, 2014March 7, 2014 by Ashton Wenborn

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Afore XXI Banorte leads Mexico’s pension fund system

Posted on March 10, 2014March 7, 2014 by Ashton Wenborn

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

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

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

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

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

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

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

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

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

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

Afore XXI Banorte

17m

Individual accounts managed

$42bn

Assets under management

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Paprec devises new technology to help EU hit recycling target

Posted on March 7, 2014March 6, 2014 by Ashton Wenborn

The European Commission estimates that the EU’s constituents together produced over 25m tonnes of plastic waste in 2008, with a third of this making its way into landfills, which is a startling statistic when considered alongside the bloc’s ambitious targets for 2020.

Far too often PVC windows, bumper stickers, yoghurt pots and materials much the same end their existence in landfill sites, prompting recycling industry players much like Paris-based Paprec to think up inventive solutions to give recyclable products a new lease of life.

The end goal of zero plastic appears all the more ambitious for France given that the country is the continent’s third-highest contributor of waste and accounts for 3.3m tonnes alone. However, the country does represent a relative bright spot for Europe in some regards, among them being that 60.9 percent of its plastics are recovered and 23.5 percent are recycled. Having said this, Paprec firmly believes that the nation can do much better.

Paprec turnover

€5m

1995

€120m

2000

€755m+

2012

No quick fix
The inherent challenges of pioneering just such a solution are twofold: not only does the recycling sector require over $100m of investment to reach an effective solution, but with over 700 types of plastic, a quick fix is entirely out of the question.

However, despite the recycling industry’s many complications, Paprec aims to both recycle new materials and also improve upon current recycling techniques in order to meet the ambitious recovery rates outlined by European authorities.

One of the key areas in which Paprec has been focusing its attention is on industrial facilities. “Our factory in La Neuve-Lyre has developed a specific treatment capable of recycling garbage bins at the end of their lives. The bins are now transformed into a high quality material to remanufacture new bins with 100 percent of the secondary raw material,” says Franck Seite, the company’s Regional Director.

Paprec currently offers the only certified industrial facilities dedicated exclusively to recycling plastics, and each are equipped with laboratories that guarantee a secondary raw material close or equivalent to the source material.

Built for recycling
There are two Paprec plants, in particular, that go quite some way in demonstrating the company’s technological excellence in the field, and both act as a yardstick for those following suit in the industry. The company’s facility in Limay, completed in 2009 as part of a joint venture with SITA, specialises in the recycling of PET (transparent) plastic bottles. The plant produces a new material from used bottles appropriate for consumption and certified food grade by the AFSSA.

This principle of ‘bottle to bottle’ manufacturing is complemented by the expertise of Dijon-based MBP, which was acquired by Paprec in June 2013 and remains the number one company in France for recycling bottles and household HDPE (opaque) bottles (milk jugs, detergent containers). To date, MPB handles a third of French plastic deposits (22,000 tonnes per year) and converts post-consumer waste into pipes for construction.

“We were the first to find an industrial solution for recycling HDPE. We had to prove ourselves in a market where recycled products had a bad reputation. The material that we offer provides a stable and consistent quality. Our customers have trusted us for over 10 years and we are now regarded as a supplier of raw materials in our own right,” said Sylvia Blond, Executive Assistant at MPB.

Paprec recycling quantities

Paprec believes that, regardless of new regulations and guidelines, many companies like itself will follow suit by making their own recycling advances (see Fig. 1), and that ultimately yellow bins will contain products aside from plastic bottles, jars and vials.
“At the moment we are able to recycle PET, HDPE and even PP (butter tubs, screw caps) plastics with 100 percent efficiency given that all of these plastics have their own dedicated channels,” says Eric Labigne, director of the company’s Neuve-Lyre plant. “However, if in the future all plastics are mixed then we must find new solutions. Whether these solutions lie with the consumer or the recycler remains to be seen, and so we’re exploring a number of options for various outcomes in the future.”

Granted, a fair few technological advances must be made if the region is to reach its 100 percent target by 2020, but the future looks altogether more positive with the likes of Paprec leading advances in the field of recycling.

Bank Nizwa prospers as Oman embraces Islamic banking

Posted on March 7, 2014March 6, 2014 by Ashton Wenborn

Islamic banking is in its infancy in Oman. The Islamic finance industry took off in the country with the opening of the first three branches of Bank Nizwa in January 2013.
Being the first fully-fledged Islamic bank in the country, Bank Nizwa believes it has a responsibility to ensure penetration into the market; to help create awareness about the industry and its potential contribution to the whole economy; to prove that Islamic finance is a professional service-oriented industry that can be part of one’s daily life; and to eventually have Oman play a role in the continued development of the Islamic finance industry. Dr Jamil Ak El Jaroudi, CEO of Bank Nizwa, spoke to World Finance about the challenges and opportunities of the market, and what to expect from Bank Nizwa and Oman in 2014.

How quickly is Islamic banking catching on in Oman, and what role do you think it will play in the country’s development?
Islamic banking as a working practical entity may be in its infancy in Oman, but it has been a need of many Omanis across the sultanate for a very long time. From the outset, with the release of the Islamic Banking Regulatory Framework (IBRF) by the Central Bank of Oman (CBO), the need for a strong and cohesive banking industry was clear. Islamic banking has been embraced with fervour by the people of Oman. Here at Bank Nizwa we have many customers visiting our branches for sharia-compliant finance.

The launch of Bank Nizwa has propelled Islamic banking and the economy of Oman to a higher level of development and we are driven towards creating a prosperous society and a stable economy. In fact, the Islamic banking industry worldwide boasted a growth rate in excess of 30 percent over the last two years, and a further increase is expected in the coming years. We have established Bank Nizwa as a centre of excellence for Islamic banking, where we provide a just and equitable model for economic growth through a range of banking tools. This is particularly true of our Islamic bonds (sukuk), which leverage the economy to new heights through the financing of public sector projects.

Islamic banking assets, 2012:

$171.8bn

Asia

$434.5bn

GCC

$590.6bn

Mena (Excl. GCC)

$16.9bn

Sub-Saharan Africa

$59.8bn

Others

$1.273trn

Total

Why has Islamic banking come later to Oman than it has done to the neighbouring GCC countries?
Oman was prudent in opening its doors to Islamic finance. We are a relatively small country, and in the last years we have seen the country grow and the economy continue to change positively. The IBRF by the CBO is a testament to the wise leadership of Sultan Qaboos bin Said, who paved the way for sharia-compliant financial products in the country through a royal directive issued in May 2011. The IBRF was devised in consultation with the global Islamic banking community and other regional and local experts. The CBO has learned from Islamic banking markets throughout the world, bringing together best practices to give Oman a tailored regulatory framework. The environment needed to be perfect before Islamic finance was ready to be launched. The key demand drivers for Islamic banking in Oman include its fast growing economy, leading to an environment of enhanced trade and commerce; increased fund raising; and investment from corporate houses and the sultanate’s young population.

Oman may be a relative latecomer to Islamic banking, but the industry is expected to grow rapidly. In time, it will make a meaningful contribution to the country’s economy and savings mobilisation strategy.

What are the bank’s plans regarding the government’s decision to issue a Sukuk in 2014 to cover its budget deficit?
Islamic banks expect that this issuance will be sizable and liquid to enable the banks to use it as a liquidity management tool. The issuance is also likely to receive special exemptions from the regulators vis-à-vis limits and capital treatment. The issuance will be in multi-tenors to create a benchmark yield curve for Oman, which all other financing products, instruments and funds can be priced or measured against.

Local Islamic banks expect the government to specifically set aside a fund which will be issued as an international Sukuk with a sovereign rating and that the lead arranger role will be given to the local Islamic banks in Oman, to help them gain international recognition, especially during its infancy stage. This will be a boost to the image of the local Islamic banks new to the international market, which will help them attract new funding from external sources.

There is a huge expected demand for a government Sukuk, so not only it will cater for what the government needs, but it will also ensure good pricing. It will be a tremendous solution for the Islamic banking industry in Oman, where there are no risk-free instruments currently available for Islamic banks to manage their liquidity. Bank Nizwa is already fully prepared to undertake a Sukuk issuance, subject to any limitations and its own internal requirements.

How does Bank Nizwa plan to raise awareness of Islamic banking among the Omani population?
Bank Nizwa has collaborated with Malaysia-based INCEIF (The Global University of Islamic Finance) since last year to spread knowledge about Islamic finance in Oman. The partnership establishes Bank Nizwa as an authority in Islamic banking dedicated not only to providing sharia-compliant financial products but also working towards the development of its employees, who will benefit from training sessions held at the INCEIF campus in Malaysia. The training programmes will allow the Islamic banking and finance personnel in Oman to interact with their counterparts from INCIEF as well.

Bank Nizwa also takes to the roads of Oman with ‘Roadshows’, which are part of an effort to get closer to the customers, communities and individuals in different parts of Oman, and to offer them useful information on Islamic banking and the Islamic finance industry. This enables us to deliver on our promise to the people of Oman: to make Islamic banking accessible to everyone.

We believe that the youth of Oman will play a major role in Islamic banking in times to come, so we are investing in that youth. We hosted a one-day Islamic finance conference at Sultan Qaboos University (SQU).

Islamic banking has been embraced with fervour by the people of Oman

The conference – the first of its kind in the Sultanate – was organised by the bank for the students and staff of SQU and created a strong partnership between the bank and the faculty of commerce at the university. The objective of the event was to raise awareness of the benefits and advantages that Islamic finance brings to the economy. In addition, it demystified the Islamic finance sector for future decision makers and leaders in the corporate world, giving students the opportunity to meet with the highly skilled Bank Nizwa team and address any questions they had on the sector. It is just one in a series of initiatives that the bank has planned in order to advance Islamic financial knowledge and develop future leaders in the Islamic finance industry. Furthermore, Bank Nizwa has arranged and executed several similar dedicated seminars to various government entities, specific to their needs, which proved to be very positive and interactive.

What is your expansion strategy in the years to come?
We will continue to increase our product offerings gradually to ensure that our customers can familiarise themselves with the principles of Islamic Banking. We have a range of products and services, which include Auto Murabaha, Goods Murabaha, Home and Land Murabaha, Service Ijarah, Home Ijarah and Land Ijarah. We also offer the opportunity for our customers to invest and earn a return through a sharia-compliant savings account. In addition, we offer a Mudarabah-based investment account, which helps our customers better manage their investment needs. Shortly we will be introducing more exciting investment products not currently available to the public.

The Bank Nizwa MasterCard debit card is available for all customers and the bank plans to launch sharia-compliant MasterCard credit cards in the second half of 2014.

We now have seven fully serviced branches. We also have a dedicated phone banking centre that is available to our customers 24-hours-a-day throughout the year, and soon our customers will have access to their banking needs over the internet. We are consistently working on enhancing customer experience across all our touch points and delivering innovative products/high-quality services across all areas – from home finance to savings accounts. We are committed to expanding our branch network across the sultanate to answer the growing needs of the population of Oman.

What are your ambitions for the bank in the near future, as well as for Islamic banking in Oman as a whole?
Bank Nizwa is redefining banking in Oman, and will continue to do so as a leading global Islamic bank. We strive to be the sharia-compliant bank of choice, and aim to find better and more innovative ways to deliver products and services to our customers. Since its inception, the bank has been making history in the financial landscape of Oman and is committed to creating an environment that serves as an inspiration for other Islamic banks and Islamic branches of conventional banks. As part of our strategy, we will continue our awareness campaign for Islamic finance and reach out to different parts of the country.

Path Solutions: ‘Technology essential to Islamic banking’

Posted on March 7, 2014March 6, 2014 by Ashton Wenborn

Having seen a significant uptick in recent years, (see Fig. 1) Islamic banking is forecast to more than double in the next half decade or so, according to Mohammed Kateeb, Group Chairman and CEO of Islamic and investment banking software solutions provider Path Solutions. However, in order keep pace with an ever-evolving financial marketplace and match increasingly lofty customer expectations, the Islamic banking sector must first ensure it invests sufficiently in technological advancements.

To reach optimistic industry expectations, the boom must be led by a banking sector that is willing to invest substantially in IT across the whole value chain.

“Not only in the banking industry, but in almost all industries, technology in the last 10 years has become one of the key strategic drivers of growth, and I believe this to be very much the case in Islamic banking,” says Kateeb.

“That is why the role of the IT department has changed a lot for the sector and become an absolutely critical source of investment for the sector. We’re witnessing trends that are similar to those in the conventional banking sector, in that digital banking is increasingly seen as important – and even the norm – in banking activities.”

New platforms and alternative methods of transaction are emerging on a daily basis, and Islamic banks must implement an adequate IT framework at every juncture if they are to adapt accordingly.

The growing importance of technology in the Islamic banking sector has seen companies such as Path Solutions come to play an increasingly crucial role in gaining a better understanding of the customer and of how the sector can expand on the world stage.

“I believe that customer expectations for financial services are generally much higher,” says the Path Solutions CEO. “Demand is for a more personalised approach and one that is a lot more varied in scope. Quite plainly, we’re finding that customers are asking for increasingly sophisticated Islamic banking products and services and that promise is being delivered upon by means of technological improvement.”

Firmly set origins
Founded in 1992, Path Solutions is recognised the world over as the market leader in the provision of Islamic and investment software solutions for financial institutions. Based in Kuwait, the global firm exhibits a strong commitment to the empowerment of the Islamic banking sector across the globe, and understands the importance of technological advancement if the Islamic sector is to rival its conventional banking counterparts.

Path’s tailor-made solutions are based on a modular approach, though simultaneously ensure full and seamless integration across the different modules.

“Considering the breadth of provided services, banks and financial institutions need to refer to a single point of contact for their total business requirements in order to save considerable time, energy and expense,” says Kateeb. Companies such as Path Solutions play a vital part in facilitating the implementation of just such support.

The Union of Arab Banks states that deposits into Islamic banking institutions have been growing at a rate of between 25 and 40 percent annually since 1975

“I believe that the main differentiator between ourselves and our competitors is that we’re 100 percent committed to Islamic banking, in that our solution is designed and built from the ground up based on sharia rules and regulations,” he continues.

“We have not bought a foreign bank, much like our foreign competitors have, customised it and marketed it to our customers as an Islamic banking institution. We do not take a conventional system, like our conventional competitors do, and dress it up to look Islamic.

“We believe Islamic finance to be completely different in the various ways in which it deals with products and solutions, and we believe it is this that has given us the competitive edge in this arena.”

Path Solutions understands that technology is a key competitive advantage for those in the Islamic banking market, and with the company’s prestigious user base and unparalleled understanding of the industry, it is well equipped to convert this expertise into efficient solutions and services in IT.

“Not only were we the first sharia-compliant software firm to be recognised and certified by the AAOIFI, but we have tremendous expertise in the market. We work with almost 100 Islamic banks worldwide, and we understand their many and various requirements in this space,” says Kateeb.

“We are committed to R&D in this specific segment and whereas for our conventional competitors Islamic finance represents one or two percent of their business, for us it represents 100 percent.”

With a range of services and solutions intended to enhance system optimisation, solution scalability, flexibility, support and risk management to name but a few benefits, Path Solutions’ integrated IT solutions suite is one that has served to streamline what at first glance appears an overly complex Islamic banking sector.

Optimising budgetary restraints
Technological solutions are not without their own set of complications; however, as the Islamic banking space has encountered its own set of problems, and budgets are becoming increasingly stretched as a result, one must look at efficient and reliable software providers with a proven track record.

Although tech spending and preparedness to invest, on the whole, remain relatively low, “we feel that banks will look for value wherever they can, with perhaps the best option being fully integrated IT solutions, which actually provide much better value and total cost of ownership over time. Systems such as Path Solutions’ iMAL are preferable to a best of breed strategy, that so often complicates the environment through the integration of different modules and different vendors’ systems, introducing different inefficiencies along the way.”

The Union of Arab Banks states that deposits into Islamic banking institutions have been growing at a rate of between 25 and 40 percent annually since 1975, and that each day an estimated $200bn is transacted in Islamic banks worldwide.

However, this is not to say that the sector has necessarily been immune to the financial crisis, and while managed assets have risen throughout, recent crises, along with globalisation has given rise to collapse, closure, and a great deal more consolidation.

“As a result of all this consolidating, downsizing and closure, the number of financial institutions has decreased in many countries, while at the same time the Islamic banking industry in terms of assets has actually increased,” says Kateeb.

“The assets are understandably concentrated in far less financial institutions than pre-crisis, of course, but this can be seen as a negative or positive for Path Solutions. Although this set of circumstances results in less customers, a smaller number of Islamic banking institutions has made the banks markedly more sophisticated and some even have more in their IT budgets to spend on services and products.”

As an industry leader, Path Solutions must ensure that it follows the direction of the Islamic banking sector wherever it may go, whether this is with regards to geography, technology or regulation

A shift in the sector’s scale and distribution is far from the only challenge to Islamic banking at present, with a distinct lack of regulatory uniformity being the most widely cited and enduring complications. However, “We feel we are flexible enough to cater for the lack of standards in the segment,” says Kateeb, “which makes us very unique, because for this business you need a very flexible system that is highly parameterised.”

The argument that Islamic banking should push for the adoption of a uniform standard is one that is reinforced by Path Solutions’ integrated strategy, which demonstrates that the Islamic banking system, when united under a single framework, can be made far more efficient in various departments.

Aside from the numerous challenges at hand in the Islamic banking sector, Path Solutions looks to benefit in the near term due to the company’s growth being inextricably tied to that of the wider Islamic finance sector.

“Today, the Islamic finance sector is growing at 16 percent annually, so, provided we can keep up at this same pace, the future looks to be an especially bright one for us in terms of growth.

“Of course, in addition to simply keeping pace, we intend to grow horizontally and are always looking at new segments in Islamic finance that will give us additional growth paths. We believe that in five years we will be, at a minimum, double our current size.”

As an industry leader, Path Solutions must ensure that it follows the direction of the Islamic banking sector wherever it may go, whether this is with regards to geography, technology or regulation. The sector has mirrored many of the same advances as its conventional banking counterparts, and in order for the industry to continue, the responsibility lies with companies such as Path Solutions to instil positive technological and structural change from within.

“Technology is certainly very important not just to the financial services industry but also to the global economy as a whole,” says Kateeb.

“New requirements are crossing the paths of those in the Islamic banking sector every single day, demanding that innovative technologies are implemented for numerous purposes, and it is only with companies such as ours that these ambitious technological demands will be met.”

Odebrecht turns attention to hydroelectric projects in Peru

Posted on March 7, 2014March 6, 2014 by Ashton Wenborn

Having undergone significant changes over the last 15 years, Peru’s electricity industry is welcoming a wave of new companies looking for opportunities. After a series of reforms, access to electricity has shot up from just 45 percent in 1990 to almost 90 percent in 2011.

Although evenly divided between thermal and hydroelectric energy sources, for many years the country relied heavily on hydropower. Now, one of the region’s key hydroelectricity players has begun developing new projects, helping to boost the country’s renewable energy mix. Odebrecht Organisation, a Brazilian conglomerate, has looked to Peru for new opportunities in hydroelectricity.

Odebrecht Organisation

1944

Founded in Brazil

$43bn

Gross revenues

192,000

Employees worldwide

Founded in Salvador, Brazil, in 1944, Odebrecht is one of the largest private organisations in Latin America, with consolidated gross revenues over $43bn and approximately 192,000 employees worldwide. Odebrecht has a significant pipeline of projects in the electricity generation sector in Peru and, with over 52,000 MW-worth of hydroelectric power plants built around the globe, it has significant experience in hydro construction.

Odebrecht’s first experience in Peru was the construction of Charcani V Hydroelectric (135MW) in 1979; a power plant built over 3,000m above sea level inside a volcano in the Peruvian Andeans. 34 years later, with extensive experience in infrastructure projects in the country, the company is building a 406MW hydroelectric plant called the Chaglla Hydroelectric Project that, once in operation, will be the third-largest power plant in the Peruvian electric system.

A modern energy mix
The Peruvian electricity system has a 7,116MW capacity, of which 44 percent comes from hydroelectric generation and 56 percent from thermoelectric units. The electric generation sources are highly concentrated geographically, with more than 76 percent of the total capacity installed near the centre of the country.

Over the last 10 years, Peruvian energy consumption has doubled and, based on the high growth rates of the economy, will require new infrastructural additions in the near future. To manage this increasing demand, the electricity sector shifted the generation mix in 2003 (86 percent generated by hydroelectric power plants) to a more balanced 56 percent generated by hydroelectric plants and 44 percent from gas-fired power plants. This has, however, created a more expensive generation system.

To foster competitiveness, and with the aim of ensuring economic growth, the Peruvian Government designed and has put in place incentives, such as tax benefits and long-term power purchase agreements auctions, to promote the construction of hydroelectric power plants.

A closer look at the Chaglla project
In December 2009, Empresa de Generación Huallaga (EGH), an Odebrecht group subsidiary specifically incorporated under Peruvian law to develop the project, was awarded a concession contract by the Ministry of Energy and Mines of the Peruvian Government to build, own, and operate the Chaglla Hydroelectric Power Plant. This plant would be a 406MW greenfield run-of-river hydropower project, located on the Huallaga River in the Huánuco region.

The Chaglla Project

4.5sq km

Area of dam

23km

Access roads

3,000

Workers

EGH hired Construtora Norberto Odebrecht, Odebrecht’s construction arm, on a turnkey lump sum contract, to build the project over 57 months, starting in May 2011. The EPC contract scheme has a single point of interface between EGH and the EPC contractor, avoiding the usual clashes generated by subdividing infrastructure projects in multiple sub-contracts.

The Chaglla project consists of two power houses, one of 6MW for maintaining the ecological flow at the bottom of a 202m-high concrete face rock-filled dam, and another one that has two Francis turbines of 200MW each, at the end of a 15km headrace tunnel. The headrace tunnel was specifically design to be built in eight work fronts at the same time as a strategy to mitigate geological risk.

The dam is being built inside a narrow canyon in a small flooded area of only 4.5 square kilometres, reducing the social and environmental impacts and allowing the project to offset over 1.8 million tonnes of carbon dioxide per year.

The project also includes a 127km 220kV transmission line to connect it to the Peruvian national grid and 23km of access roads that integrates 15 villages, improving access to education, health and trade for almost 6,000 villagers. As of January 2014, the project is more than 60 percent complete, with more than 3,000 workers aiming for a possible early completion.

Odebrecht successfully sold 284MW of its production in March 2011 to Electroperu, a publicly owned electricity company, for a 15-year term that starts in October 2016. This was done on a competitive auction conducted by Peru’s Private Investment Promotion Agency. The aim of these auctions is to facilitate the development of large-scale electricity projects by securing an off-take for the energy generated by the project while reducing the volatility in revenues.

Power purchasing
The 15-year power purchase agreement (PPA) contract, one of the longest tenures available in the Peruvian electricity market, is denominated in US dollars, with the price escalated by combined US and Peruvian inflation adjusted by the USD/PEN exchange rate.

The power generation of the project in excess of the PPA will be sold in the spot market, and Odebrecht has hired experienced consultants with specialised knowledge, such as Danish Hydraulic Institute (DHI), BA Energy Solutions and PSR, to support the power generation analysis and production tied to the PPA.

After the PPA signing in May 2011, EGH contracted a bridge loan with BNP Paribas, Société Générale and BBVA, which later was shared with DNB Bank ASA and Sumitomo Mitsui Banking Corporation. A new bridge loan was also provided by Deutsche Bank fronting the funds from the Peruvian Development Bank, COFIDE.

Concurrently with the bridge loans, a thorough due diligence assessment of the project was being conducted to address all risk analysis and required mitigation for structuring a long-term financing under a project finance mechanism with limited recourse. The due diligence process included reviews on legal, engineering, commercial, economic, safety, environmental, social, health, tax and insurance aspects, among others.

The engineering characteristics of the project, including its hydrological data series, were further validated by Mott MacDonald, a leading engineering firm hired by the lenders to audit the project during the due diligence process. Additionally, EGH retains the services of an expert panel comprised by globally recognised engineers who periodically provide key advice in the construction methodology.

Committing to the community
Odebrecht’s excellent track record in carrying out large infrastructure projects, while ensuring the mitigation of social and environmental adverse effects, meant that the design and implementation of the project was carried out under international standards for sustainable procedures. Therefore, development banks, such as the Inter-American Development Bank (IDB), Brazilian Development Bank (BNDES) and COFIDE, found the financing structure appealing.

Odebrecht also launched the CREER training programme in the communities surrounding the project, which is designed to develop and improve the skills of the local labour force in fields such as carpentry, masonry, welding, hostel services, health and safety, without cost to the participants. Today, the project employs over 600 of the 1,286 graduates from the CREER programme and has already started its advance stage for training in heavy machinery operations.

[Odebrecht] trained local farmers in better practices to increase and improve the productivity of their agricultural lands

Besides the CREER programme, Odebrecht designed and put in place different plans to foster the development of the local population promoting agreements between local producers to sell their products to the project’s food provider and national chain stores. The company also trained local farmers in better practices to increase and improve the productivity of their agricultural lands, as well as facilitating the delivery of the Peruvian Government’s social programmes on health, education and empowering local citizens in decision making processes.

As part of the social and environmental impact assessment, a comprehensive hydro-biological study was performed, which included monitoring upstream and downstream of the project location during both the dry and wet seasons. This was done as part of the efforts to ensure that the project would not endanger present species. The project also involves the monitoring of key native fauna and flora species, and the construction of a greenhouse that hosts a collection of about 9,000 orchids.

After several months of negotiations, Chaglla Hydroelectric Project successfully reached financial close in July 2013. The debt funding reached $774m, and was provided by IDB, BNDES and Deutsche Bank (fronting COFIDE) as senior lenders and by Société Générale, BBVA, DNB Bank ASA, Sumitomo Mitsui Banking Corporation and Credit Agricole as participants in the IDB’s loan. In addition to the security package, a financial model was built to facilitate the credit analysis of the lenders. This allowed for the analysis of different hydrology scenarios over the credit metrics of the project; the DSCR of the project must observe two levels at the same time, one under a base case scenario and another under a break-even scenario.

The Chaglla Hydroelectric Project experience has helped Odebrecht establish good practices in developing all aspects of a big project, and provided a deep knowledge of the Peruvian market, as well as proving Odebrecht’s ability to structure a large project financing. This transaction will certainly set the benchmark for the other new projects that Odebrecht is developing in the energy sector in Peru.

Fermaca’s energy projects spur economic growth in Mexico

Posted on March 6, 2014March 5, 2014 by Ashton Wenborn

The controversial reforms to Mexico’s oil and gas industry that were approved in December 2013 may have drawn howls of anger from opposition leaders, but they mark an encouraging turning point for the country’s economy. For years, many of Mexico’s most important industries have been closed off to foreign and private investors, with state-backed monopolies enjoying complete control. One of President Enrique Peña Nieto’s key election pledges in 2012 was to reform the country’s monopolised industries, opening them up to fresh investment from the private sector and overseas, in an effort to give the economy fresh impetus and attract billions of dollars worth of foreign and domestic investment.

The reforms have offered global energy powerhouses like Royal Dutch Shell, BP and ExxonMobil the opportunity to secure a part of Mexico’s under-exploited energy market. The country is already the 10th-largest oil producer in the world, but it is thought it could jump up the rankings with increased investment and technological advancements. The natural gas market is also considered to have huge potential, with Mexico estimated to have the sixth-largest shale gas reserves in the world.

With many companies hoping to be able to capitalise on this newly opened up market, a local level of expertise is vital. One of the country’s leading local firms is Fermaca, which has a long history of construction and engineering in Mexico, and in the last 15 years has dedicated much of its resources to building pipelines for the natural gas industry.

Rich history
Launched 50 years ago, Fermaca originally began life as a construction company, helping to build much of the country’s infrastructure during the second half of the 20th century. Octavio Berron, Fermaca’s CFO, says this was mostly for government-sponsored schemes, and included “a lot of highways, water systems and sewage works, hospitals, and telecom infrastructure.”

The speed at which Fermaca has constructed the pipeline, as well as the way it has navigated the many permitting and routing hurdles, has won praise from the industry

However, due to the financial crisis that hit Mexico in 1994, Fermaca faced a difficult situation. Many leading national companies were failing, while the huge increase in interest rates hit Fermaca hard. “At Fermaca, we started to restructure the company and decided that this situation, [with] these ups and downs that is inherent to the construction industry, was too much to handle. So the owners decided to diversify into new activities and to move the company towards a more stable operation,” says Berron.

Around the same time, several legal changes were being made to the country’s natural gas regulations, which allowed for private sector involvement in certain aspects of the industry. “Those reforms opened up the commercialisation, transportation, storage and distribution of natural gas to the private sector. By having the skills of an engineering and construction company, Fermaca began to learn about the oil and gas business,” says Berron.

The company’s first major break into the energy market was towards the turn of the century, when Shell auctioned off a pipeline project it had been developing in the central region of Mexico. The pipeline, in the Palmillas-Toluca region, had taken Shell four years to develop, and the company had experienced huge cost overruns in the process without laying a single piece of pipe. Eventually they auctioned it off to Fermaca, who built the pipeline and turned it into a successful project.

“Fermaca stepped forward and acquired the project, putting forward a new construction plan,” says Berron. “14 months after the acquisition had taken place the pipeline was built and the gas was flowing. This was the first pipeline the company had constructed and it was in operation around 2003. There have been no incidents or accidents since that point, and it has been delivering gas and serving the communities of Toluca reliably and safely.”

Chihuahua pipeline
Fermaca saw the success of this market and sought to take on another pipeline project. In 2011, the Comision Federal de Electricidad (CFE), which is the Mexican government’s electricity utility monopoly, called for bids to build three major pipelines in Mexico that were devoted to providing natural gas to power plants. “We won the second project, which was the Tarahumara Pipeline, also known as the Chihuahua pipeline,” says Berron. “This is a 380km pipeline that delivers gas from the border between El Paso City and Juarez City to supply the state of Chihuahua.”

He adds that the reason Fermaca was awarded the deal was simple. “We put together a proposal that complied with all the technical aspects, as well as the financial aspects, and we offered the lowest present value of the service for the 25-year contract to CFE.” The success of the Palmillas-Toluca pipeline is also likely to have contributed to the company’s ability to design, integrate and cost out pipelines.

It hasn’t taken long for Fermaca to look ahead to new projects

The speed at which Fermaca has constructed the pipeline, as well as the way it has navigated the many permitting and routing hurdles, has won praise from the industry. Berron says the company was able to achieve this in part due to its rich history in other areas of construction. “We were able to secure 100 percent of the ‘right of way’ in a record time of just five months. This is really important, as there is no pipeline in Mexico that has achieved this and done it with internal resources. This goes back to the origin, where all the background in construction – the technical team, surveyors, environmentalists, topographers – has paid off. It was a very interesting and challenging process.”

Regional development
The significance of the deal is huge, says Fernando Calvillo, Fermaca’s President and CEO, as it is the only Mexican pipeline independent from the government’s oil and gas monopoly that is connected to the US. As the market opens up to more entrants, this border region will become more significant. “We have the capacity to transport one fifth of the total consumption of natural gas in the country. Seeing [as] natural gas imports [are] open to anyone, we will be able to bring extremely competitive gas prices. Mexico has until now regulated prices with Pemex. I think this corridor will become a hugely important region. The Chihuahua project is the most important connection into the US that is not owned or controlled by government companies. Therefore, it can provide a huge impulse to private industries along the entire northern corridor of Mexico.”

Since the pipeline began operations in July last year, Berron says there has been increased interest from companies in Mexico and over the border. “We have been approached by an important group of companies that are considering the strategic location of the pipeline and the availability of gas on the other side of the border. The market conditions there, and the prices, mean they are approaching us to expand capacity and support the needs of companies that are in very different sectors. These include companies in power generation or petrochemical activities and all sorts of industries looking for the most efficient and competitive way of using energy. It puts us in a position to serve the local distribution companies. They have also approached us and they acknowledge that our proposal is more efficient, reliable and competitive. This will translate into lower prices for the individual users of gas in the Chihuahua region.”

New projects
It hasn’t taken long for Fermaca to look ahead to new projects. Just a week after the delivery of the Chihuahua pipeline it was awarded another project by the CFE. This time it was to provide compression services to CFE through the Soto la Marina Compression Station. “Soto la Marina is an area of the country that is in the Gulf of Mexico in the State of Tamaulipas,” says Berron. “We are building a 45,000-horsepower compression station to add compression to one of the largest components of the national pipeline system, which is the backbone of the gas grid in Mexico. This project, which we have in a joint venture with Enagas, the owner and operator of the Spanish gas pipeline grid, is scheduled to be in service in December 2014, and we are actively working towards that.”

Financing such projects can be tricky, especially in the relatively uncertain economic environment of an emerging market. However, Fermaca achieved it by putting in a considerable amount of equity and obtaining substantial project finance. “We put together a package and looked at a typical type of project finance,” says Berron. “We injected 20 percent of equity [in the Chihuahua pipeline], which was $98m, and fully funded up front. The rest was from a group of seven international banks and Mexican development banks. These included Citi Bank, Scotia Bank, and Bank of Tokyo.” Securing investment for future schemes will likely get easier now that the government has passed its reforms for the industry.

President Peña Nieto’s reforms to the energy markets are long overdue, but have proven very difficult to secure. Opponents and protestors, although in a clear minority when weighed against the general Mexican population, sustained a long but ineffective campaign suggesting that Peña Nieto was selling off one of Mexico’s most valuable industries. Nonetheless, the reforms were secured after congress voted in their favour and the vast majority of state congresses endorsed the vote. The government is keen to attract billions of dollars worth of foreign and national investment into the industry after 75 years of state control, and Calvillo describes the passing of the reforms as “an enormous feat in Mexico’s economic history. We are hoping that a whole new era of opportunities in the energy market will present themselves. We want to be positioned to seize these opportunities and to continue building the infrastructure and energy facilities of Mexico, such as pipelines and terminals.”

“Give us back our respect”, cry Chinese workers in IBM strike

Posted on March 6, 2014 by Ashton Wenborn

Over 1,000 Chinese workers have gone on strike at an IBM factory in China, close to the border with Hong Kong, citing objections over the changes in their contracts ahead of a takeover of the facility by Lenovo. The takeover is part of a $2.3bn deal where Lenovo will assume IBM’s x86 computer server business, including the International Systems Technology Company (ISTC) subsidiary in question. The strike is only the latest in a series of actions in which workers challenge takeovers.

The New York Times has reported that a video was posted in a Chinese social media platform in which hundreds of workers dressed in their factory uniforms protested in front of the IBM x86 facility. With them, they carried banners with messages including ‘Workers are not a commodity’ and ‘Give us back our respect’. The strike is likely a result of fears of mass layoffs taking place after the takeover, though the deal is still pending regulatory approval.

The strike is only the latest in a series of actions in which workers
challenge takeovers

Protests are said to have began on Monday, and production remains suspended in the facilities. According to one protesters, speaking to the Financial Times, the workers are acting independently of the government approved All China Federation of Trade Unions. “The [official] union has never done anything to help protect our rights,” the FT quotes the worker as saying. “We don’t trust it or the [government] labour bureau.”

“Employees currently involved in x86 operations in Shenzhen have a personal choice of remaining with ISTC under terms and conditions comparable in aggregate to what they currently are receiving, or they can voluntarily choose what we believe is an equitable severance package and resign from ISTC,” IBM said in a statement. Employees are demanding higher payments for workers who decide to remain with Lenovo and for those who leave.

Over the past few years a number of such strike actions have popped up around China, as workers demand higher wages and better working conditions. In two separate strike action cases in Guangdong province, tens of workers were prosecuted for ‘public order’ offences.

ADCB: corporate governance essential for post-crisis growth

Posted on March 6, 2014 by Ashton Wenborn

As global banks continue their cautious re-emergence, most of them are now scrambling to devise and update their corporate governance structures, policies and regulations intended to safeguard and sustain growth, and possibly to shield from future potential crises.

Those that succeeded in softening the eventual blow of the sub-prime crisis were the ones that had the strong basics in place; they are the ones that have always placed a strict emphasis on corporate governance as an important pre-requisite to the success and resilience of a financial organisation.

Furthermore, these institutions were not only able to minimise the damage to themselves, but were also able to maintain a decent reputation within society while maintaining their contribution to the overall economy. This shows that the way a financial institution is run and governed directly impacts its macro-environment.

Abu Dhabi Commercial Bank (ADCB) recognises that good governance is critical to achieving its objectives and successes. The bank has designed its governance framework with due care and careful consideration of local and international best practices and guidelines, stakeholders’ interests, sustainability and long-term objectives. It is fully committed to the guiding principles of responsibility, accountability, transparency and fairness, which it considers to be the four pillars of good governance.

Similarly, ADCB recognises that its stakeholders have a vested interest in its success and sustainability, and that good governance practices play a critical role in ensuring that each of these interests is respected.

A noteworthy model
As ADCB continues its unrivalled success story and embraces the ‘new normal’ across global markets and economies, one of its core objectives is to continue to redefine governance strategies and to uphold standards of excellence. This was the recipe that helped it beat all the odds during the recession of 2008-09, and the same formula that will help it achieve its ultimate goal of evolving into the number-one bank of choice in the UAE.

Those that succeeded in softening the eventual blow of the sub-prime crisis were the ones that had the strong basics in place

Rami Raslan, Senior Corporate Secretary, Legal and Board Secretariat at Abu Dhabi Commercial Bank, says, “Corporate governance is a mindset – a case of ‘want to’ versus ‘have to’. Our honest approach and transparency in the market have been key to ensuring the brand maintained pole position at all times. ADCB pledges to uphold its genuine values, and remains committed to its key stakeholder groups, namely customers, country, employees and shareholders.”

Some of the bank’s efforts include sustainability reporting, enhancing its disclosure and transparency reporting systems, as well as the integration of governance risks into its lending criteria process. The bank’s concerted efforts have led to international recognition as a governance leader in the region from a number of publications.

World Finance has acknowledged ADCB’s corporate governance policy as one of the best in the UAE this year. It was the first bank in the GCC to meet the stringent disclosure and transparency requirements to sell bonds to US investors (the 144A programme) in 2009, and was the central focus of a case study by the World Bank for its corporate governance achievements.

Principled banking
These measures demonstrate ADCB’s ongoing commitment to honouring its guiding principles of responsibility, accountability, transparency and fairness, and aim to optimise its performance and efficiency, as well as achieving long-term sustainable growth. Such efforts have led to ADCB being recognised internationally as a governance leader in the region.

Today, ADCB has a robust governance structure due to the support and commitment of its board of directors, CEO and senior members of management. The board, board committees and senior management all fully monitor its governance framework. The bank has also invested in forming a dedicated team of professionals and governance experts who actively monitor local and international governance developments. This team regularly reviews the bank’s governance practices and proposes strategies to implement best practices within the bank.

ADCB’s aim to be the bank of choice in the UAE requires constant innovation while ensuring the highest levels of integrity, in order to gain and maintain the respect of its key stakeholders. To achieve this ambitious vision, its governance approach lives and breathes by its slogan, ‘long live ambition’, through its continuous monitoring, dialogue and fresh initiatives, and enables ADCB to meet the evolving interests of its stakeholders and deliver sustainable growth and long-term value.

Going forward, the bank intends to focus on key governance areas, such as in-depth reviews of: risk governance (to consider risk issues and ensure full board awareness); Islamic banking; organisational transparency (including e-learning training on corporate governance); and remuneration governance.

INA to explore unconventional reservoirs in Croatia

Posted on March 6, 2014March 5, 2014 by Ashton Wenborn

The oil and gas industry is undergoing a transformation. This is due to huge investments and growing costs of exploration and production, where there’s a strong increase of oil production from unconventional sources in the US, and refinery overcapacity in Europe. There is also increasing competition stemming from the Middle East and India. Coupled with changing product trade balances between the US and Europe, vast changes are happening in the demand and the development of new fuels.

Demand for energy in general in developed economies is in decline, in terms of the energy needed to generate additional units of GDP, due to advances in technology and energy efficiency. The current unfavourable economic situation in Europe has also affected demand for refined products and gas. Now and into the foreseeable future, emerging economies will drive global demand growth for oil and gas.

Some of the trends coming to the forefront are increases in offshore oil and gas production, which is expected to equal on-shore production in the next 20 years, and re-exploration of onshore reserves. Developing countries still continue to be one of the most important targets of new explorations.

Risk-based operations
Today, companies are forced to conduct more risky explorations in extreme geographical, climatic or political conditions, where exploitation and production becomes difficult, and simpler options have disappeared. For example, the cost of setting up one rig onshore is $1m, but offshore this cost is significantly higher, where the cost of drilling in the Adriatic Sea is $50m to $70m. Often, the geologic picture is not enough, nor is it crucial for estimating the feasibility of investment.

Did you know?

Total energy consumption is almost 6 times what it was in 1950 & per capita use has nearly doubled

Besides exploration and production challenges, the industry has to tackle the issue of climate change and resilience. If we take into consideration that total energy consumption per year is almost six times what it was in 1950 and that per capita use has more than doubled, it is clear that the oil and gas industry has to develop capacities for flexibility and adaptation in order to ensure long term sustainable business operations, and security of supply.

According to the National Intelligence Council, demand for water, food and energy will grow by another 50 percent, primarily due to development in Asia, Africa and South America. Having in mind the planet’s limited recourses, energy companies will have to find ways in which to minimise the use of natural resources like water – production of energy is water intensive – and decrease their greenhouse gas emissions.

INA leads the way in Croatia
As a medium sized European oil and gas company, INA leads production in Croatia, with oil processing and oil products distribution activities. Given the big energy transformation currently taking place in Europe, INA has been intensifying its exploration activities both in the continental part of the country and offshore, driving the social and economic development of Croatia, while reconciling environmental, economic and social demands into a long-term coherent sustainable strategy.

State regulations are still one of the major issues for investors and companies in Croatia. Legal uncertainties caused by frequent amendments and the change to EU regulations are a significant obstacle for investment. Other important issues that influence the business climate are complicated public administration, high para-fiscal charges and frequent changes in the tax-code.

Croatia entered the EU on July 1, 2013, which marked the start of the new game realities for Croatian energy companies

Over the years, development of Croatian energy policy was closely linked to the process of accession to the EU. The main goals of energy policy are the continuity (safety) of energy supply, competitiveness of the energy system and sustainable energy development.

Croatia entered the EU on July 1, 2013, which marked the start of the new game realities for Croatian energy companies. In that respect, the Croatian energy sector is focused on increasing the exploitation of energy sources to satisfy domestic needs, but also to potentially become an exporter of certain energy sources, including natural gas.

To facilitate investments and the entrance of new market players, the state passed a new mining act in May 2013, which made prerequisites for new investments, and the new Hydrocarbons Exploration and Exploitation Act two months later. The government announced that this year it would publish first tenders for oil and gas exploration in the Adriatic Sea.

INA, as a recognised and desirable partner is ready to apply and set strong partnership with some distinguished oil companies, not only in Croatia, but also on the territory of Montenegro. Unique regional knowledge – in terms of quality insight in geological terms and specifics of the local market – puts INA into advantageous position and could therefore be a good ally to any oil and gas company in the forthcoming upstream projects.

Tertiary methods on the domestic market
Since it was founded, INA has been involved in exploration and production operations in 20 countries. Today, it is focused on Angola and Egypt. Until 2012, the company conducted successful business operations in Syria where it participated in exploration activities with peak production in 2011. In order to secure long-term sustainable business, INA will focus on exploration and acquisition of reserves abroad in the coming period.

The use of tertiary methods is on the rise in order to revitalise mature oil reservoirs. These methods use the most gas injection of CO2, which increases the level extraction by more than 60 percent. According to the International Energy Agency, such enhanced oil recovery techniques could release around 300 billion barrels of oil globally. Oil fields in Croatia are around 30 years old, and the older they get, the faster the drop in production.

INA goals for the next two decades

3.4m

Tons of oil

500m

Cubic metres of gas

Therefore, the company turned to extracting additional quantities of hydrocarbons from older fields using the mentioned technologies. This year INA is going to start extracting additional quantities of hydrocarbons in domestic oil fields, using for the first time enhanced oil recovery methods in Croatia. The project includes injecting CO2 and water into partially depleted oil reservoirs, and besides the economic dimension, it also brings ecologic value due to decrease of CO2 emissions.

Over the next 20 years and further, INA expects to extract an additional 3.4 million tons of oil and approximately 500 million cubic meters of gas using this and similar methods.

Likewise, the company plans to fracture and explore unconventional reservoirs on several rigs. First unconventional drillings had been made in late 2013. Along with this, the company is focused on increasing the production of hydrocarbons from existing onshore fields, and produce additional significant quantities of hydrocarbons in the following years.

Fighting an unfavourable environment
For five decades now, INA has been one of the strongest Croatian companies and a reputable regional energy company. Introducing the new corporate governance model in 2009 its management has set the preconditions that enabled INA to be more adaptive to the market and to answer the business challenges in a more efficient and successful manner.

The current economic environment in the eurozone is unfavourable, and Croatia has been in recession for the past five years, which has resulted in a drop of demand. In such an environment, INA still invests more intensively in order to ensure stable oil and gas production and supply.

Currently, it is the only company in Croatia with the necessary knowledge, experience, equipment and projects that can accelerate exploration activities onshore. Those activities were significantly intensified during last few years, and therefore became a major growth factor for capital investments. Moreover, INA made three discoveries of oil and gas in the past three years.

In the refining sector INA operates in an increasingly harsh environment, as the European refinery sector is facing a number of structural trends that have led to shutdowns of almost 20 European refineries in the past five years, and the trend is continuing. After $1bn of investments into refineries in last five years, we need to review our further investments in this segment, due to a challenging business environment, including economic and industrial aspects.

Innovation and sustainability in retail
INA holds the leading position in retail and manages a regional network of almost 450 petrol stations. Advanced retail services are in the focus of INA’s business, and sustainability plays a significant part. With this in mind, INA started a project named “Energy for the future” aimed at building a self-sustainable, ecologically acceptable and innovative petrol station.

Now and into the foreseeable future, emerging economies will drive global demand growth for oil and gas

As the leader in applying sustainable practices, INA wants to set new standards in Croatia by applying green technologies in the energy retail segment, and offer added value to its customers and the community in accordance with its commitment to promote energy efficient projects.

New petrol stations will use different technology solutions for more rational usage of resources needed for everyday work, including storage and usage of heat in the heating system, using alternative energy sources in the cooling system, use of rain water, as well as using nanotechnology, LED lightning and recycled materials wherever possible.

Over the last couple of years INA has focused on most promising aspects for its long-term survival, by finding and exploring new gas and oil wells in order to secure supplies. Operating in a turbulent environment the company, like other energy companies, faces the challenges of ever-accelerating change.

Constant effort in maintaining its solid financial position have also stabilised the gearing levels at less than 30 percent at the end of 2013, from the dangerous 44 percent level in 2010. The crisis opened creative potential, which promotes positive effects and maintains motivation.

We share realistic optimism, which means that we do not expect that in 2014 and beyond things will improve on its own. Rather, we will continue to seek new opportunities to improve our future performance, while grasping the future as it emerges, while at the same time exploring and taking advantage of current trends.

Chinese Premier outlines ambitious growth targets

Posted on March 5, 2014 by Ashton Wenborn

China’s Premier Li Keqiang has released his first work report since taking charge during the latter stages of 2013, with the headline being that China’s GDP growth forecast this year will remain unchanged from the last at 7.5 percent.

“We must keep economic development as the central task and maintain a proper economic growth rate,” said Li before the annual meeting of the legislature today, as the country sets its sights on ambitious GDP growth.

Some say, however, that the forecast is overly optimistic and that surely growth on this scale cannot help but stymie reforms.

It’s unlikely that China’s economy can continue at quite the same pace if it’s serious about opening up state-controlled industries to private parties, boosting consumer spending and making banks far more market-orientated, among a host of further reforms aimed at achieving more sustainable growth.

Nonetheless, Li insists that the targets laid out in the report will not inhibit reform, and that he will continue to make changes and balance the country’s economy.

“Reform is the top priority for the government,” said Li to an audience of 3,000 delegates. “We must have the mettle to fight on and break mental shackles to deepen reforms on all fronts.”

The 7.5 target “is in keeping with our goal of finishing building a moderately prosperous society in all respects, and it will boost market confidence and promote economic structural adjustment,” he said.

China’s performance so far this year has been something of a mixed bag, making it difficult to predict what exactly the future holds for the world’s second-largest economy.

The country’s manufacturing activity fell to an eight-month low in February, according to the official Purchasing Managers’ Index, whereas China’s annualised trade surplus rose 14 percent in January, only for its export and import growth to slow through February.

The inconsistency of China’s performance thus far this year serves to underline the importance of reform if the country is to maintain sustainable growth.

Although a 7.5 percent growth rate would signal a two-decade low for the economy, the figures here should be seen as second fiddle to the essential task of balancing China’s economy.

Report highlights

Major targets for 2014:

GDP growth of 7.5 percent
Consumer Price Index increase of 3.5 percent
Creation of 10 million more urban jobs
Keep registered urban unemployment rate at maximum of 4.6 percent
Increase personal incomes in step with economic development

Three key principles: the government should…

… create impetus by deepening reform;
… keep economic performance within a proper range;
… work hard to raise the quality and returns of development, promote industrial upgrading and keep improving people’s wellbeing.

PPPs give Greek economy the boost it needs

Posted on March 5, 2014March 4, 2014 by Ashton Wenborn

Despite Greece’s six-year recession, one of the strongest signs yet that the country has been working to repair its ailing sectors in a coherent and structured manner is in municipal solid waste management through PPPs. There are four preferred bidders that have been announced in the Western Macedonia Peloponnese, Central Macedonia (Serres) and Western Greece (Ilia) regions, and eight tender procedures are in progress.

A long history in PPPs
Culminating in the establishment of a sound legal framework (L/ 3389/2005), PPPs in Greece have a longstanding history. With a single law designed for PPPs the legal gap that led each project to parliament for ratification was overcome.

Other hindrances that delayed the implementation of projects have been cleared out as well within the single legal framework, allowing PPP projects to be co-financed by private and public funds. This is something that happened in the past for the implementation of important initiatives, including the Rion-Antirrion Bridge and Athens International Airport.

The Greek PPP Law (L/ 3389/2005) is the result of an extensive consultation between the market and the state. Throughout the years we have seen that its main merit is the all-encompassing character of legal provisions from project inception through to contract signing.

The other attractive feature is the use of project finance practices, such as the establishment of a separate firm – the Special Purpose Vehicle SPV – that pulls off the web of contracts typical in limited recourse infrastructure projects. The comprehensible approval and tendering process given by the public sector for PPP projects adds to the mix.

The awarding actions are clearly drafted and in line with European directives

The awarding actions are clearly drafted and in line with European directives. Detailing the minimum content of a PPP contract specifies the contractual framework. The PPP Law acts in a wide spectrum since it can be used for the implementation of both concession projects based on users’ fees and PPP projects based on availability payments by the state. The strength of the legal framework is highlighted by a series of decisions by the Supreme Court providing a tested legal environment.

Adhering to PPP standards
PPP Inter-Ministerial Committee for PPPs (ICPPP) acts as the collective governmental body that sets the general policy for PPPs and approves projects that should continue the implementation through the PPP framework. This gives wide acceptance of the PPP project throughout the market and the state’s civil service. The PPP Special Secretariat follows the structure and role of equivalent units in other member states of the EU for the implementation of PPPs.

The PPPs Secretariat mission is to support and assist the ICPPP and public entities on identifying, preparing, procuring, implementing and monitoring PPP projects. The endeavour lies on the premise that we are trying to safeguard fair competition among bidders through transparent and intensely competitive tender procedures.

Therefore, the legal umbrella provides a solid decision base and transparency. All public sector procuring authorities follow its guidelines wholeheartedly. In many PPP markets there is a need to ensure the compliance with state budget. So, before approval the Secretariat is making sure that the capacity of the state to repay the availability payments is properly attested.

With this in mind, a 10 percent threshold of the annual Public Investment Program cannot be exceeded for PPP availability payments, making sure not to create liabilities that cannot be repaid and simultaneously giving the comfort to investors and lenders of a visible payment path.

The Hellenic PPP Program is actively supported by the European Investment Bank, which has funded the first PPP project to reach financial closure, for the implementation of seven Fire Stations by 50 percent. It has also approved in principle funding for three school building projects and the first Waste PPP project in Western Macedonia.

Waste not; want not
The implementation of PPPs in Hellenic municipal Solid Waste Management (MSW) follows a European pattern of planning and procurement of projects that secures and promotes competition, legitimacy of procedures and the implementation of operationally sound schemes.

Greece is one of the few EU member states that still uses landfill for most of its waste. The amount of MSW landfilled was 4.2m tons in 2010, equivalent to 81 percent of the total generated MSW. EU legislation urges for environmental protection giving the stimulus – through financial penalties – for the proper separation, re-use, recycle and treatment of waste.

Under this context, priority was given to the proposed waste management projects from local authorities that showed a strong willingness to solve their waste management problem. A key factor to the continued effort to procure the waste management projects was the commitment of the central government and the local authorities to the PPP method. Local authorities have certainly been encouraged to follow the standards given by the Secretariat regarding PPPs.

Certain features enabled the stakeholders to have a sanguine view of waste management through PPPs. The detailed service output specifications are clearly a detachment from subjective input-driven technical specifications that the whole public procurement system was based on.

For decades the choice of technology as per the way waste was to be managed was the apple of discord

Stakeholders have approved and accepted the transfer of the waste treatment risk from the public to the private sector, set upon a prescribed level of service that follows EU directives.

With PPPs, the role of the market regulator is upon the state officials. The local authorities and central government are planning and implementing waste PPP projects in complete coordination with each other.

For decades the choice of technology as per the way waste was to be managed was the apple of discord, delaying any advancement in municipal solid waste management.

In all PPP waste management tender procedures in Greece, all available technologies are allowed, as long as they cover all goals set by EU directives, national and local policy, and they have a proven track record. Waste PPP projects, under the PPP law, involve the design, finance, build, maintenance, technical management and operation of integrated waste management plants for 25 years.

The Western Macedonia PPP
The integrated waste management system of the region of Western Macedonia is the first waste management project via a PPP that follows the laws set out by PPPs, and will have an approximate capacity of receiving 120,000 tons of municipal solid waste serving the needs of 300,000 people in northern Greece.

Project design was carried out with the need for pre-emptive reduction in mind for the generation of municipal waste, and the requirements from the Western Macedonian authorities that followed national and EU regulations.

The partnership will shape the Greek waste management practices and is completely compatible with the core of the EU strategy in the waste management field. It ensures that the reduction of waste volume is being led to landfill and the minimisation of environmental hazards through the diversion of biodegradable waste from landfill. This project is a performance-based agreement in which the private sector will be assessed against the contracting authority requirements in delivering the services.

These were expressed through a set of more than 100 key outcome targets that have been developed, and refer to every aspect of the private sector services. The PPP Secretariat’s involvement was in project preparation, implementation and monitoring, and approved the consistency of the tender documents and the overall project structuring according to international standards and the PPP law.

It is worth noting that the whole contractual framework, including output specification, key performance indicators (KPIs), and the payment mechanism, has followed the UK model and the project has been approved in principle by the European Investment Bank.

The private bidders competed mostly in pricing terms, the lowest ‘gate fee’ that will burden the inhabitants of Western Macedonia. The bidders had to prove that they could achieve certain standards, such as a minimum percentage of biodegradable waste diversion at 75 percent, and the percentage of residual waste after treatment to be kept under 40 percent, and the shortest estimated time of service commencement.

For the first time in Greece we have introduced the process of ‘competitive dialogue’ which aims to introducing the thoughts and views of the market early in the tender process in order to shape the best environmental output, which can also be bankable.

An example of this course of action is the announcement of the preferred bidder in the integrated waste management system of the Peloponnese region that will serve approximately 600,000 people and assuage the region’s heavy waste management problem. In July 2013 and only after 13 days of an evaluation period a preferred bidder was announced, giving a solid proof of the market’s appetite to enter the waste management arena.

Looking forward, 12 waste management projects including the Western Macedonia are under procurement with a total value of €2bn, co-financed by EU funds, creating more than 2,500 new jobs during the facilities’ operation and 3,000 new jobs during construction works throughout Greece.

For further information visit www.espa.gr