2014 | World Finance

ICS: taking the stress out of core banking replacement

Posted on March 5, 2014March 3, 2014 by Ashton Wenborn

Nowadays, the current competitive environment coupled with increasingly demanding customers is forcing banks, regardless of size, to use the latest banking technology. This core banking replacement process can either result in the bank leapfrogging to a high degree of differentiation, enabling it to compete on the customer experience and new product offering, or it can create huge risks for the bank if the transition is not managed properly.

As a result, the core replacement decision is often considered one of the riskiest and costliest IT projects a bank takes on. Another challenge facing financial institutions is standardising their operations. As many banks are comfortable using their legacy systems, they often tend to add modules from numerous vendors which results in having over-burdened systems that can potentially crash.

Out with the old
ICSFS has been providing banking and financial solutions for over two decades; its first packaged banking solution was launched in the early 1990s and has been awarded and recognised for excellence since. Its flagship, ICS BANKS solution, is parameterised so clients can quickly put to use the features they need with minimal time, risk, effort, and cost. ICSFS has recently faced a core banking replacement challenge with its new customer (Group of Banks), which consisted of replacing many legacy systems, one of which was an in-house system, and 25 banking satellite systems. The main requirements for the group were a fully-fledged bank-in-a-box solution that provides a full range of modules and also incorporates a flexible group model.

[C]ore replacement decision is often considered one of the riskiest and costliest IT projects a bank takes on

ICSFS’ philosophy has always entailed providing international standards packaged as an Off-the-Shelf (OTS) product with the value added capability of tailoring the product to consider local and country specific requirements. With this, the system flexibility starts from the outset. One of the company’s customers has witnessed a merger with four other banks that were successfully integrated and went live in three and a half months. They are now operating as a consolidated group.

Another record-breaking project completed was for a large bank in Nigeria, for nine banks mergers of which each bank had a different core banking system totalling to around 300 branches. ICSFS has also accomplished vanilla core banking implementations within weeks for several customers.

Operating in competitive market
In order to compete in today’s financial marketplace, once implemented a core banking solution should be robust, scalable, efficient, flexible, and serves for a long time. This is so banks can avoid an entire core replacement, which can take years and cost hundreds of millions of dollars. Bank customers are also becoming increasingly demanding. Many expect all information to be in real-time and integrated, regardless of the channel being used. That is why ICSFS invests in its products to meet all current and future needs of the banks and financial institutions.

Today ICS BANKS is running 24/7. This service is also scalable to measure that ICSFS had a benchmark for its system with IBM in France, and it attained unmatched performance results. This reflects ICS BANKS’ agility to provide high levels of operational efficiency, meeting end users’ ever-changing demands and evolving business requirements, and delivering powerful banking solutions designed for use by the world’s largest banks.

It is fully empowered by Oracle’s latest technologies and products that furnish the system with the newest technology and infrastructure trends. ICSFS was the first in the whole region to move its system to oracle 10g, then to Oracle 11g, and now it recently moved to Oracle 12c, which is the latest.

ICSFS has received many awards for being a creative and excellent solutions provider. It is present in 31 countries, three continents, and its client base includes 81 customers that are all running banks or financial institutions. More than 70 percent of ICSFS’ clients are in Asia, 21 percent in Africa, and eight percent are in Europe. After 33 years of non-stop effort, ICSFS’ vision is always to be on top among other solution providers and to keep its systems at an international level.

Can upcoming IBA event solve Europe’s energy problem?

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

The rampant search for new sources of energy has meant colossal amounts of money are being put into various schemes across the world in an effort to avert a global energy crisis. But with this rising investment comes a heightened level of risk, and so it is vital that the regulatory and legal framework surrounding such exploration is fully up-to-date. Other considerations include the impact on the environment, as well as the infrastructure requirements for each project.

With the US managing to move towards energy independence and China seemingly scouring the world for resources that will bolster its insatiable demand back home, Europe is facing heightened competition in securing itself the necessary access to energy. Concerns over its links to pipelines from Russia means that the EU needs to find a way to develop its own sources of energy.

In April, a gathering in Berlin has been arranged by the International Bar Association (IBA) that will see some of the leading figures in global energy and infrastructure come together to discuss the issues facing the industry. The ‘IBA Biennial Conference of the Section on Energy, Environment, Natural Resources and Infrastructure Law’ will bring together heavyweights from all the key industries involved in harnessing natural resources and developing new energy.

Arranged by the IBA Section on Energy, Environment Natural Resources and Infrastructure Law (SEERIL), and supported by the IBA European Regional Forum, the event will see attendees from industries that focus on the environment, energy, mining, oil and gas, construction, water, and infrastructure. Public regulators and academics will also be in attendance.

Supplying energy
According to SEERIL Council Member Dr Claus Peter Martens, a partner with Rolema Attorneys and Notaries in Berlin, “The question of energy supply is one of the most vital issues today.”

Fracking has been the buzzword of the last few years in global energy circles, especially with the apparent success that the US industry has enjoyed in uncovering large deposits of natural gas. As other countries look to get in on the natural gas action, governments have been keen to attract investment from across the world in developing this potentially rich new source of energy. However, many governments have been cautious about shale gas, highlighting the potential risks to the environment that it might bring.

Germany, France and Bulgaria have all banned fracking over the concerns of its effects on drinking water and the wider environment. The UK, by contrast, has enthusiastically embraced the idea of developing its own shale gas industry, and has even been offering incentives to local communities that allow for drilling to take place in their territory.

Dr Martens says that ensuring Europe is able to compete on the global energy markets is essential to the continent’s future. “Europe as a trading block is in competition with the US and China. China is increasingly getting more access to resources in Africa. How Europe keeps its access to energy is one of the fundamental challenges facing it.”

Despite its rejection of fracking, Germany is looking at uncovering more natural resources, especially in the search for precious metals. “In Germany, mines are re-opening, including new metal mines, particularly in the Saxony region. They are now seen as crucial to industrial development,” says Dr Martens.

Coming together
The event, which will take place on April 27-30 at the Hotel Adlon Kempinski in Berlin, will allow all those attending to get a unique insight into the key issues affecting this search for new energy. Topics the event will focus on include environmental financial assurances for infrastructure and resource developments, financing power projects, and key developments in resource litigation.

Ensuring Europe is able to compete on the global energy markets is essential to the continent’s future

It will also look at how wind farm projects are developed, the issues around fracking, new nuclear power station builds and the lessons learnt from the Fukushima disaster, the dangers of mining near cities, and the impact of global changes in commodity prices on the pricing and distribution of natural gas in Europe.

The IBA is the ideal organisation to arrange this sort of event, as it will keep the focus on the most important aspect of such developments – regulations. Without strict adherence to and proper insight into the different regulations and laws in numerous jurisdictions, major energy projects will struggle to get off the ground. The regulatory landscape is also undergoing dramatic change, and so the IBA’s expertise will allow a first class insight into all the potential reforms being made in different regions.

Established in 1947, the IBA is the world’s leading association for legal professionals and law societies, and helps influence international law reforms. With a membership of over 55,000 individual lawyers and 206 bar associations, its influence stretches across the globe.

Pakistan energy sector ‘to flourish’, asserts Engro CEO

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

The installed generation capacity of Pakistan increased by about 3,500MW during the period 2009-12, resulting in a total installed capacity of 23,500MW in 2012. During the same period the demand supply gap went over the 7,000MW mark. This shows that there is investment in the sector, but demand continues to outstrip supply. Therefore, in order to meet the forecasted demand of 36,000MW by 2020 an additional supply of 12,500MW is required in the system over the next few years.

The policy framework in Pakistan is geared to attract investment in the power sector. The current Power Policy 2002 (as amended in 2006) provides for lucrative dollar based equity IRR and a sovereign guarantee to projects on the condition that the power purchaser is a federal entity and that the tariff is approved by NEPRA.

The derailing of the power sector was mainly due to the formation of the circular debt. This surfaced in 2008, mainly due to the delayed notification of various tariff increases from 2003 to 2007 which resulted in delayed billing of the differential amount.

In 2012, the circular debt figure rose to a near $5bn mark. The situation became so dire that the Government of Pakistan (GoP) defaulted on its sovereign guarantee for the first time in the history of the country, defaulting on payments of approximately $450m to nine IPPs’ that generate 1,700MW of electricity.

Since 2008, the cost of power generation increased three-fold. The average generation cost/tariff currently stands at PKR 13.68/kWh, making the need for subsidy to also increase threefold. The lowest cost of generation is PKR 0.16 /kWh for hydro and the highest cost of generation comes from HSD and RFO being PKR 21 /kWh and PKR 16 /kWh respectively. Hydro generation stands at 32 percent, whereas HSD and RFO is 36 percent of the total generating capacity of the country.

This situation mainly came about due to the dependence on conventional thermal fuels with accelerating prices for power generation. This was further aggravated by subsidising gas, a depleting fuel in Pakistan.

The weightage of heavy fuels in the power mix, pulled down investment in the sector as the receivables continued to mount, and the subsidy provided by the GoP was unable to keep pace with the rising price of expensive fuels.

The turnaround year
The new government has also directed an un-popular but necessary tariff hike in two phases. A 40 to 45 percent hike for industrial and commercial users in August last year and a 20 to 50 percent increase for the residential bracket in October 2013 in order to implement IMF’s plan for phasing out the subsidies.

Energy in Pakistan

23,500MW

Installed capacity (2012)

36,000MW

Forecasted demand for 2020

A move toward cheaper fuel sources has been seen in the development of the first Thar coal mine in Pakistan. Engro plays a vital role with the government of Sindh in developing Thar coal. A ground breaking ceremony of the project took place in February this year where the Sindh Engro Coal Mining Company (SECMC) will set-up a 3.5 Mt/a (600MW) capacity mine in 3.5 years after financial closure that can quickly be expanded to 6.5 Mt/a (1,200MW), and then up to 19.5Mt/a (3,600MW) in the future.

Engro also has the capacity and expertise to facilitate the conversion of existing furnace oil based power plants to Thar coal, and it will be analysing the prospect. It is simultaneously developing the needed infrastructure for the LNG import to provide for the much needed energy on a fast track basis.

The move away from conventional fuels was also reflected in the vision statement of the National Power Policy in 2013, where it was stated that “Pakistan will develop the most efficient and consumer centric power generation, transmission, and distribution system that meets the needs of its population and boosts its economy in a sustainable and affordable manner”.

The long-term steps required for the development of the power sector require new investments in alternate energy projects. Thermal currently constitutes 62 percent of the generating mix and a 68 percent installed capacity.

Engro also has the capacity and expertise to facilitate the conversion of existing furnace oil based power plants, and will be analysing the developments. By developing the required infrastructure on a fast-track basis, more energy efficient opportunities will become available.

Paving a nuclear path
With the federal government, in November 2013 it was announced that there would be development in nuclear power with the KANUPP-2, and KANUPP-3 power plants. They are expected to add 2,200MW to the national grid. The first 1,100MW is due to be commissioned by 2019. Last year also saw the announcement of Gadani coal power project of 6,600MW in Baluchistan with the first 1,320MW expected to be commissioned by 2017.

[Nuclear plants] are expected to add 2,200MW to the national grid

For long-term sustainability and to abate the consequences of peak oil, hydel and renewables (mainly solar) need to be explored rather than solely developed like nuclear and non-renewable energy. For solar energy, small and off-grid solar parks can be commissioned in areas with high Global Horizontal Irradiance (GHI).

The higher the GHI the more you are able to utilise the energy from the sun. In Pakistan, Quetta has the highest GHI. On grid solutions can also be developed for the industrial hub. Engro has been the first to venture into the solar space, by initiating a 360kW grid connected to a solar generating unit in March last year.

Even though 360kW is a small project, this is the largest solar power generation facility in Pakistan. This unit is expected to generate power for the Daharki colony with the capability to provide power to the grid on a net metering basis.

The project is currently in its test phase and has encouraged us to take the next step and expand this experience on a commercial scale. In the solar field the government of Punjab, along with Punjab Power Development Board (PPDB), has initiated a Quaid-e-Azam solar park for the development of 1000MW of solar power in the Bahawalpur region of Punjab, which was also initiated in 2013.

Another crucial factor for the development of the power sector is to improve the efficiency of state-owned units. In the meantime fuel supply should be diverted to the efficient IPPs rather than state owned power units, which tend to be inefficient due to old technology.

The federal government also needs to revisit the transmission strategy and the distribution network to reduce the gap between the government notified tariff and the NEPRA notified tariff, which not only provides for higher fuel prices as part of the subsidy given by the government, but also the inefficiencies of the transmission and distribution network.

Of the nine distribution companies (DISCOs), PESCO and HESCO are known to have high losses with numerous sub divisions routinely showing losses in excess of 70 percent. For efficiency in the network National Transmission and Distribution Company (NTDC) and the DISCOs need to be privatised (see Fig. 2).

We have a success story from the privatisation of the Karachi Electric Supply Company (KESC) that has improved on its recovery by incentivising neighbourhoods that have no theft and recovery issues, and with no load shedding. Pakistan has all the right policy incentives, a known 25-year power tariff with pass through fuel costs and taxation, and the risk of exchange rate variation is covered by providing for dollar indexation, and the sector also has government guarantees and protection.

In a policy framework like this, Pakistan is set to flourish in the power sector, with continued progress and implementation of stakeholder recommendations.

Intelec Holdings sees Mozambique prosper

Posted on March 4, 2014September 20, 2017 by Ashton Wenborn

Mozambique is virtually indistinguishable from the country of a few years previous, and anyone returning to the southeast African nation after such a time will recognise just how far the country has come in terms of socioeconomic development. After a stint of extraordinary growth, Mozambique’s newfound prosperity has given rise to economic and financial advantages for various sectors. Underpinned by the country’s vast resource base, political stability, and thriving business environment, Mozambique has emerged as an attractive environment for business and an economic climate filled with potential.

The southeast African nation is forecast to exhibit the second-highest growth rate in the continent from now until 2017, with an estimated average annual GDP growth rate of 6.88 percent, surpassed only by Malawi with seven percent. The country’s expansion from thereon is expected to exhibit even more impressive gains, with some analysts predicting that it will reach a peak of 15 percent by 2020.

Booming sectors
Among the best performing sectors to date are energy, mining, construction, agriculture and tourism, all of which have exhibited impressive gains and will likely continue to do so, provided the country remains on the same track.

In the field of infrastructure and civil construction, Mozambique currently ranks seventh in Africa in terms of number of projects, representing around $32bn. The sector also looks on course for continued expansion in the near future as foreign investors seek to exploit the country’s natural resources and improve upon its infrastructural capacity.

With regard to Mozambique’s agriculture, the Economist Intelligence Unit (EIU) estimates that over the course of the next few years investment in the sector will reach as much as $3.8bn dollars. Growth in the agriculture sector is especially positive for Mozambique, given that it accounts for the largest source of revenue for Mozambican families.

The tourism sector has also attracted several major foreign investors who’ve focused predominantly on constructing lodges and hotels to facilitate growth in the coming years. As a consequence, the market for travel agencies and tourism has matured, with each of the country’s various attractions seeing significant sales boosts as a result.

Among the best performing sectors to date are energy, mining, construction, agriculture and tourism

The country’s natural resources, in particular minerals, represent the largest natural capital in the country’s possession and perhaps the area of most significance in terms of revenue. Mozambique is among the 10 largest producers of coal in the world, and is believed to harbour as much as 23bn tonnes in reserves.

With regard to hydrocarbons, it is important to note that Mozambique boasts an impressive reserve base of approximately 200trn cubic feet, not to mention that petroleum will soon be made available in Mozambique, with the country’s first exploration due for commencement in 2014.

If the country manages to secure a steady stream of investment and improve upon its current infrastructural capacity in the coming few years, the near future could see hydrocarbons emerge as a major constituent of the Mozambique national economy. As an extension of this eventuation, if Mozambique’s recoverable assets are properly exploited, the country could quite possibly become one of the largest producers of natural gas worldwide.

Clearly there are a multiplicity of opportunities at hand in Mozambique, though for the country to go on to unprecedented economic successes and attract investment from further afield, companies must seek to take advantage of the sectors already exhibiting growth.

Growing the economy
Intelec Holdings, which was established in 1997, has accompanied and contributed to Mozambique’s economic development in the various sectors in which it operates, these being some of the biggest departments that have generated investment and boosted economic growth.

The holdings group was recently named the 11th-largest company in Mozambique, as part of the 15th edition 2013 of KPMG’s top 100 Companies, and also bears the ‘Made in Mozambique’ seal (acknowledging the company’s dedication to domestic products and industry) – something that represents the company’s commitment to furthering the country’s development.

The company is currently focusing on diversifying its investments to better leverage its existing channels, thus ensuring a better and safer return for investors. Intelec’s strategy in a very broad sense is to identify partners with knowledge of how best to serve the markets in which it operates.

Intelec Holdings’ mission is to act as a strategic partner for the various sectors in which it is active, and to further boost national development. The company’s vision is to contribute to the diversification and integrated growth of energy, mining and the other sectors in which it participates, in order to encourage national economic growth in Mozambique and improve upon the country’s business climate.

Intelec Holdings represents a number of key players in the energy sector, among them Electrotec, Electro Sul, Aberdare, and Gigawatt, who together play an integral part in powering Mozambique. Electro Sul in particular, which is certified by ISO 9001, KEMA, ISO 14001 and STS, has played a key role in advancing the country’s electrical and electronic engineering proficiency, as well as in the management of energy networks. The Intelec subsidiary was selected for the World Quality Commitment Award – Paris 2010 in recognition of its commitment to quality, leadership, technology and innovation in the field. Electro Sul is also a major partner of Electricity of Mozambique (EDM) and constitutes a considerable part of the country’s electricity demands as a whole.

In the textiles field, Intelec Holding is preparing to revitalise the sector following a factory reactivation in conjunction with three major Portuguese partners. The project is entitled MCM (Mozambique Cotton Manufacturers) and the amount of money involved equates to an investment sum in the region of $40m.

Foreign investment
External business partners have given monetary authorities reason enough to support foreign investment, whereas the state, through the implementation of its fiscal policy, regulates and streamlines the most important socioeconomic areas and creates a suitable business environment for private enterprise. Extensive legal reforms in aspects of law as far ranging as financial, tax, labour, trade legislation and ownership have also strengthened Mozambique’s business environment and encouraged private investment by quite a margin.

The economic potential of the country with respect to investment in agro-industry is formidable, and is best characterised by the industry’s generous tax incentives. With the aid of various economic agents, together with the family sector, developments such as AgroMoz in the provinces of Nampula and Zambézia, which together equate to approximately 60,000 hectares, have been made possible.

Intelec’s achievements in innovation and national development are also quite evident in technology and human resources, which are both emerging as significant contributors to the Mozambique economy. What is certain is that the country is growing, and Intelec is living up to its ambitions to form a vital part of Mozambique’s growth process.

The success of the company also lies with its visionary Chairman Dr Salimo Abdula, who has seen opportunities where others have seen threats and positioned Intelec in an ideal spot to make real progress. In addition to being the Chairman of Intelec Holdings, Abdula is also Chairman of Vodacom Mozambique, a company of which Intelec Holdings is also a shareholder. Further still, Abdula is President of the Business Confederation of Portuguese Language Countries (CE- CPLP) and the Chairman of the General Assembly at the Confederation of Business Associations of Mozambique (CTA).

Abdula is believed by many to rank among the 100 most influential figures in Africa, and has played a crucial part in Mozambique’s socioeconomic development. Intelec Holdings, under the guidance of Abdula and the rest of his team, looks forward now to continued growth, wider development and improvement in all the sectors in which it operates, while simultaneously seeking to create value for its shareholders, partners, and the communities in which it works.

Is Alinma redefining Islamic banking?

Posted on March 4, 2014September 20, 2017 by Ashton Wenborn

What is in a name? Apparently quite a lot if you are in the business of being an Islamic/sharia-compliant bank. In fact, in early January, Noor Islamic Bank of Dubai made the costly strategic decision to adopt the simplified moniker, Noor Bank. Most startling of all was the reasoning behind the shift.

Said Noor Bank Chief Executive Hussain Al Qemzi: “The oldest Islamic banks started by adding the Islamic term into their names because the idea at that time was new. But over time, the majority of Islamic banks – including the biggest ones such as Al Rajhi, Baraka and Kuwait Finance House – don’t have it in their names because it doesn’t add value.”

If ‘Islamic’ doesn’t add value, this raises the question: just what is Islamic banking?

Uncertain terms
To a certain degree, it has to be recognised that the whole is greater than the sum of the parts when it comes to defining the difference between Islamic and ‘sharia-compliant’ banking. In truth, anyone can be sharia-compliant. For instance, no one would ever argue that HSBC is an Islamic bank, yet with its Amanah brand, HSBC met all the requirements for sharia-compliance.

And therein lies the rub: sharia-compliant banking is mechanistic while Islamic banking is holistic. The problem is, how do you apply regulations, rules, standards and practices to something that is as nebulous and undefined as the term ‘Islamic’? Most people in the industry and most consumers know ‘Islamic’ when they see it, but they would be hard pressed to provide an accurate description and definition.

Is it sufficient to be a purveyor of products and services that have been certified as being halal by qualified Islamic scholars? What if a provider of such services doesn’t have a sharia board, opting rather to apply its own research findings in this matter? Is it still Islamic?

Are there requisite business practices that must be followed in order to be ‘Islamic’? For instance, must there be separate branches for men and women? Must the employees follow a dress code? Are there limitations on the use of imagery in advertisements? Or is it sufficient to simply structure products to be in line with Islamic banking standards?

Religious guidelines
One can see how a web of idiosyncratic standards can crop up when trying to define what is Islamic. Sharia-compliance, on the other hand, can be proved by analysis of a bank’s adherence to the well-defined religious guidelines set forth in both the classical and contemporary books of Islamic jurisprudence. You no longer have to guess as to the nature of the banking being done, because the industry landscape has already been shaped by strong legal tradition and precedent.

The problem is, how do you apply regulations, rules, standards and practices to something that is as nebulous and undefined as the term ‘Islamic’?

Thus, arguments can be avoided over just how Islamic one bank is versus another. Such arguments are unseemly, and their accusatory nature would actually threaten the integrity of the industry as a whole. However, by using sharia-compliance as the measuring rod, argumentation is avoided and consumers are given the power to evaluate products and services for their individual adherence to the standards and practices that consumers and their societies deem important. And indeed, in this discussion, the consumer is truly the key.

Dubai, which has not been coy about its designs to take the leadership position in the Islamic banking industry, now has a bank (Noor Bank) that feels confident that it can move forward and secure market share without directly presenting its Islamic bona fides via the name of the bank. This means that, in Noor Bank’s estimation, they can address consumer concerns over the structuring of their products without appealing directly to Islam in an in-your-face manner. Saudi Arabia is prime example of this approach in practice.

A bank is a bank
Of the 12 commercial banks licensed to operate in Saudi Arabia, four function as fully sharia-compliant entities: Alinma Bank, Bank AlBilad, Al Rajhi Bank and Bank AlJazira.

The word ‘Islam’ or ‘Islamic’ is clearly not present in their names, and you will furthermore not find mention of those words on their websites or in their marketing materials. In fact, the Saudi Arabian Monetary Agency (SAMA) does not differentiate between Islamic and conventional banks. For SAMA a bank is simply a bank, and all banks must adhere to requisite SAMA policies related capital adequacy, transparency, accounting, etc.

Alinma pushed the envelope even further by using a colour palette consisting of dark browns combined with fresh pastels. Not exactly what one might expect from an Islamic bank

It is up to the banks themselves to determine how to position themselves in the market and establish their aforementioned Islamic bona fides. And in a country where Islam is part and parcel of nearly every aspect of daily life, banks have found that it better suits their needs as institutions, and better addresses consumer concerns, to lead with the notion of sharia-compliance rather than the notion of being Islamic.

Even if one looks to the brands of these Islamic banks themselves, you find them eschewing some of the more traditional imagery that one might associate with an Islamic brand. The colour palettes of these banks, for instance, show an attempt to stand out in an environment flooded with Islamic imagery such as ornate Arabic calligraphy and the ubiquitous use of various shades of dark green.

Alinma Bank, which launched most recently in the Kingdom, had every opportunity to invoke Islam more directly, and might have been justified in doing so given that its competitors were utilising unique colour schemes and non-traditional imagery. Yet Alinma pushed the envelope even further by using a colour palette consisting of dark browns combined with fresh pastels. Not exactly what one might expect from an Islamic bank.

However, in an atmosphere where Islam is so ubiquitous, there is no need to force the Islamic concept upon the public. That would make a bank passé. Alinma and others have continued to explore the limits of creativity and have, most importantly, chosen to push a values-based approach when communicating the extent of their sharia-compliance.

Local trends: sharia-compliant banking in Saudi Arabia
It has been said that all real estate is local. That is to say that despite national trends, local realities still hold sway in the determination of real estate valuations. Something similar can be said of Islamic banking. What applies to Saudi Arabia may not, and often does not, apply in other markets such as the broader GCC area, Malaysia, London, etc.

Saudi Arabia has a population of 25 million and an economy that is rapidly diversifying. For banks, opportunity abounds, and there is not as much incentive to look beyond the Kingdom’s borders. Therefore, banks’ decisions to position themselves as being sharia-compliant really only makes sense in the Saudi context. The same rationale doesn’t apply to Dubai, where banks might need to think about what best serves a regional or broader international strategy.

It must also be noted that it is the unfortunate reality that the geopolitical climate over the past decade has led to a tarnishing of the Islamic moniker. And in some markets, even invoking sharia can be detrimental to the image of an institution. In a market such as London, there may be a need to refer directly to Islam and sharia-compliance in order to secure a core segment, but in terms of dealings beyond that niche, the word ‘sharia’ could be problematic.

There is also a difference between retail and corporate banking markets. At a corporate level, business is just business, and there is arguably less of a concern over the name of an institution. It is really at the retail level where the brand becomes paramount as a bank goes about pleading is case to the masses. And one would be remiss not to mention that there might also be third option, that of dropping Islamic references altogether.

At the end of the day, Islamic/sharia-compliant banking is essentially asset-backed banking that has an ethical angle to both how it operates and deals with customers. As such, the creative minds in branding might look to create a moniker that captures those two aspects and packages banking in a way that appeals entirely to the values of institutions and the mechanisms used to develop and sell products and services.

Perhaps, in a Western context, calling it something as simple as ‘classical’ banking would be more fitting. Either way, it seems that Islamic banking is here to stay and will continue to develop creatively to fit the markets in which it operates.

Unify CEO: ‘millennials are changing communication’

Posted on March 4, 2014March 3, 2014 by Ashton Wenborn

“It used to be that you’d work in a fixed location of some sort, and people were tethered to that environment, whereas today it’s entirely untethered,” says Dean Douglas, newly appointed CEO of Unify – formerly Siemens Enterprise Communications.

“I haven’t been down to my office in a few weeks now, and I think that increasingly we’re all finding this to be very much the case for ourselves. No matter how you work, the fact is that you’re no longer tied to your desk, and that, in essence, is the fundamental change affecting our industry.”

In recent years the communications software services industry has undergone a period of transformation, after having long ago advanced from its simple beginnings in telecommunications and more recently incorporated all manner of devices into the mix.

“Because of these multi-faceted communications, business has changed dramatically,” says Douglas, who spoke to World Finance about the ways in which the workplace dynamic has transformed and how it is the communications business has changed as a result.

Studies undertaken by the Pew Research Centre show that by 2020 approximately 50 percent of the workforce will consist of millennials, who, says Douglas, are best characterised by a desire to be social and to leverage technology wherever they can in satisfying this pursuits. As such, the future of the workplace will be a product of both technological and cultural change, and one that will be typified by a multi-faceted, web-based and increasingly mobile approach to communications.

“I find myself doing as many video conferencing calls as regular conference calls these days, and, on top of that, maintaining a strong presence on various social media platforms which is becoming an important part of my business day-to-day. These social aspects, coupled with the increasingly complex ways in which we communicate today, have been the biggest driving forces behind the company and the wider industry in recent years,” says Douglas.

Technological evolution
It is imperative in today’s hyper competitive climate that businesses are able to easily communicate their performance targets and strategy with as little complication as possible.

The communications software services industry has undergone a period of transformation, after having long ago advanced from its simple beginnings

“Only a few short years ago in what some would call a “traditional business environment”, if you wanted to host a video conference for example, you’d have to go into a specially fitted room with the appropriate equipment and support.

“Skip forward to the present day and most enterprises can dial into a web-based platform and download the appropriate software to make just about any video conversation happen. When you think about that huge transition, you begin to wonder about what else can be achieved. If you can make something as extraordinarily complex as video accessible to all, then think of what else is in store for the future of communications.

“Having experienced this evolution first hand, I think this is why the marketplace today is looking for a way to incorporate that same sense of innovation in various other areas, while at the same time integrating the whole solution.”

Born of Siemens’ engineering DNA, Unify builds on a rich heritage of excellence and innovation to bring integrated communications and networking solutions to 75 percent of the Global 500. Late on in 2013 the vendor rebranded as Unify, and, with this announcement, stated its intent to focus specifically on addressing the various ways in which the workplace dynamic has changed communications for good.

“The fact is that the marketplace is changing significantly and we’ve got a brand that really does embrace where we want to be and where the marketplace is heading, and that is unifying communications beyond on-premise capability.”

The new brand reaffirms Unify’s commitment to be a transformational leader in the segment and brings the company’s focus to moving to solutions that go beyond simple unified communications to solutions that bring communications, content and context together to provide more powerful collaboration than was ever possible before.

This shift in the way people communicate, driven by an increasingly millennial workforce, is something that we feel we have to address

“These developments drive progress for a lot of organisations, ourselves included, and call for a much more robust communications solution. This shift in the way people communicate, driven by an increasingly millennial workforce, is something that we feel we have to address.”

Unify’s principal targets are fourfold in nature, says Douglas, with each focal point designed to bring the company’s diversified communications solutions to market ahead of the rest, and to keep apace with the rapid rate of technological and cultural change in the industry. The company’s first area of focus is to make sure that they’re adequately leveraging its people.

“What I mean by that is we take advantage of the broad skill sets that we have here and that we make sure our employees’ skills and capabilities are capitalised on to full effect.”

Unify’s second area of focus is to gain a further understanding of the changing marketplace and, as a result, the challenges that its customers are facing in the communications space in the future.

“Over the last few years we’ve seen customers challenge traditional views in our industry as communications have become a lot more mobile, and gathered web capability like never before.

“For this reason we need to keep moving to make sure that we’re very much in sync and prepared for these market changes, both from a customer requirement and an education standpoint.”

Aside from Unify’s recent efforts to plug its new combined communications platform Ansible, the company continues to focus on product development and expansion among its existing portfolio.

“Thousands of companies, including some of the largest in the world, have substantial investments in Unify on-premise communications solutions. Our role as their trusted advisor is to help them with a road map to address these marketplace changes and the demands of an increasingly mobile and millennial workforce, while maximising their investments in existing technology.”

Spearheading specialised products
The company’s final point of focus is through expanding its geographic reach and tapping emerging markets. As the developing world becomes much more technologically adept, emerging nations will come to require Unify’s services in a way that is efficient and cost-effective for their specific set of circumstances.

As the developing world becomes much more technologically adept, emerging nations will come to require Unify’s services in a way that is efficient and cost-effective

Expansion in this field represents a sizeable opportunity for companies such as Unify, one that it cannot afford to ignore if it is to remain at the forefront of the industry. Its products differ quite crucially depending on their stated purpose. Whereas the company offers some products that are horizontal in the sense that they address basic communications requirements for just about any enterprise, its second area of focus is on providing specialised solutions for specific clients in numerous industries.

“One of the crucial areas we’ve addressed in terms of the vertical marketplace is financial services; we have a trading desk platform that is very robust, in fact one of the largest traders, Wells Fargo, uses our platform for trading,” says Douglas. “We also have a set of capabilities that address specific requirements for healthcare providers, which are very distinct from what you might find in other enterprises.”

The product that best characterises Unify’s unified approach to communications, however, is ‘Ansible’, which looks to redefine the way in which people interact in the modern day workplace.

“Ansible is a suite that allows for meaningful communications across virtually any interactive channel or device. What it creates is seamlessness across various devices and the ability to have the same conversation on any number of platforms.

“I think that a robust communications solution should provide for the opportunity to make more accurate decisions because all the facts are accessible. If you’ve got the ability to address various sources of relevant information then there’s no reason why companies can’t respond rapidly to whatever opportunities there may be,” says Douglas.

Ansible is a direct response to the changing demands of the workplace and something that will surely improve team productivity, given that the opportunities for collaboration and communication are almost endless.

It is only with a focus on the changing workplace dynamic and a continued commitment to matters of technological development that Unify will continue to be a leader in the communications space.

“We will ensure that we continue to be a market leader by providing innovation while maintaining that same level of quality we have become renowned for,” says Douglas.

“Some of the biggest brands in the world rely on us for key elements of their communications, so we’ve got to be able to provide them with the capabilities to communicate effectively both internally and externally.”

There is no doubt that the workplace we know today will change dramatically in the future, however, with new and innovative products such as Ansible, Unify is well positioned to cater for any forthcoming market changes.

Energy market critical to Romania, says OMV Petrom

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

Romania’s two-decade long and ongoing market liberalisation has seen the country undergo extraordinary changes, and while macroeconomic indicators have improved as a result, there remains a fair few areas in need of improvement if the country is to match ambitious EU targets. Not least of Romania’s economic constituents is the oil and gas sector, which has undergone perhaps the biggest transformation to date.

However, for the industry to realise its full potential it must first negotiate the inherent complications of Romania’s free market transition.

“The energy market is quite critical to Romania’s continued economic success and I would say it has great potential to become a key economic growth driver,” says Mariana Gheorghe, CEO of South-East Europe’s largest oil and gas producer, OMV Petrom.

“The first reason for this being that it has quite a diverse primary energy mix, made up of oil and gas, hydro, nuclear and coal to name a few; the second being that the region boasts a strong presence of foreign investors, and plays host to numerous and world renowned names from across the energy value chain.”

The poster child business
Gheorghe is well positioned to pass comment on the transition, as OMV Petrom is seen by many as the poster child of Romania’s turn from state-run to free market economy.

“These past 10 years have seen what was a former state-owned company turned into the country’s largest commercial entity,” says Gheorghe, who has led the company from strength to strength since the beginnings of Romania’s market liberalisation.

Responsible for 40 percent of Romania’s oil and gas supply as well as €9bn worth of investment into the recovery and modernisation of the national oil and gas sector, OMV Petrom’s clout in the market is more than substantial. The company’s activities span exploration, production, refining and marketing, and its oil and gas reserves stand at approximately 750 million boe (barrel of oil equivalent) in Romania alone.

OMV Petrom

40%

Of Romania’s gas and oil supply

€9bn

Investment into recovery and modernisation of oil and gas sector

750m

Oil reserves (barrel of oil equivalent)

“Here I’m talking about OMV Petrom being the largest contributor to the Romanian state budget, having contributed almost €14bn to state coffers in the last nine years, which approximates to 10 percent of the revenues to the state budget.”

The company has occupied a space in the Romanian market since 1856, and in 2004 Austria’s OMV acquired a 51 percent stake in the company to mark the beginnings of an extensive transitional period, bearing a certain likeness with that of the national economy. A decade later and “we have turned the company into a role model of successful and sustainable performance,” says Gheorghe.

“We’ve changed many things, from the way we’ve developed our strategy, to the investments we’ve made, the systems we’ve put in place, our management structure and style, and the emphasis we place on developing a socially responsible company.”

These changes are far from exclusive to OMV Petrom, however, and can be seen across the entirety of Romania’s economy, although there are none that have weathered the transition with quite the same proficiency.

“The sector has been subjected to innumerable changes for over a decade now, and while many of the reforms have been completed, it will take time for those affected to adjust,” says Gheorghe, who admits Romania still lags behind in certain departments. “All of these regulatory as well as technical challenges are continuing to put pressure on our performance.

“First, the energy liberalisation has not been completed so we’re really seeing the risk in that the regulatory changes are still on going. We also have changing oil and gas prices to contend with, we are a European market therefore the activity of these international prices impacts on us. Not to mention the fact that we have a special situation here in Romania where the health and safety regulatory practices fall short of some other countries, therefore we need to catch up in that field.

The energy market is quite critical to Romania’s continued economic success

“In Romanian oil and gas we have two situations, we have the old fields with the challenges of maturity, or the very new deep off shore fields, which are posing different types of technological challenge to us.”

Nonetheless, OMV Petrom has adjusted to market changes with unparalleled success, and in doing so has become the country’s most valuable company. “Given that we’ve had such tremendous success, we’ve set a benchmark for those undergoing transformations, transitions and conversions in this new economic environment.”

Speaking on the ways in which OMV Petrom intends to advance Romania’s energy industry, Gheorghe says that the company’s strategy is founded on three pillars: business, people and social responsibility.

“Our objectives are very clear, we want to continue to be the leading integrated oil and gas company in South-East Europe. We’re geared to on one hand grow in upstream activities, particularly in the Black Sea region, which means the exploration of new territories and on the other the stabilisation of current mature production. In downstream, what is important for us is to optimise and modernise our existing portfolio of assets. All of this requires financing of between €1bn and 1.2bn per year.”

“People are a key resource in this technologically challenged world,” Gheorghe adds. “What is important for us is to gear their skillset for our growth strategy. We have quite a lot of initiatives and projects, and our labour force is very much engaged with what we do,” which leads onto OMV Petrom’s final commitment to matters of social responsibility.

People are a key resource in this technologically challenged world

“The last pillar is very critical for us, that sort of role modelling and listening to the public agenda is a big chunk of our past, present and future strategy. As the largest oil and gas company in Romania we have a responsibility to the wider communities in which we work, and in this field, in recent years we have trained 10,000 students and almost 2,000 teachers on entrepreneurship.

“In the last five years, we have developed hundreds of community projects, and have encouraged more than 6,000 volunteers from our own workforce and from those of our partners’ to engage with the community. We are the largest private employer in Romania,” says Gheorghe. “We’re currently responsible for 20,000 direct jobs and a further 60,000 indirect jobs from our 15,000 suppliers. This, along with our continued investment into the country’s energy industry means that our industrial, economic and social contribution is second-to-none.”

Becoming a company role model
Granted, OMV Petrom’s responsibility for such a substantial proportion of Romania’s oil and gas products, as well as 10 percent of the country’s electricity supply is a critical measure of the company’s success, however its role in reviving Romania’s struggling energy sector is of equal significance.

Corporate governance at OMV Petrom

10,000

Students trained on entrepreneurship

6,000

Community volunteers from OMV Petrom

20,000

Direct jobs

“We dare to say we’ve put the Romanian oil and gas industry back on the map because of what we’ve achieved in terms of consolidating our existing operations and venturing into new territories, such as deep offshore projects and new onshore technologies.”

Many of the issues that have inhibited the country’s energy industry are far from exclusive to Romanian shores, “in the gas market, for example, we’ve seen demand decrease by almost a third in recent years and overcapacity stymied our earning potential, which are on going challenges for us and the wider industry.”

The very fact that the country is still adjusting to ongoing reforms means that corporate governance standards and regulatory practices are certainly trailing those of other countries, especially those in the EU.

“Corporate governance is an especially big challenge for Romania’s industry, being an entirely alien concept to a former communist country where for such a long time there was no such a corporate dimension,” says Gheorghe. “Therefore, it’s important for us to not only have business aims and strategies but to demonstrate the benefits of strong corporate governance in practice. That’s really something that we take pride in, as we believe it’s essential to have strong corporate governance and to be a good corporate citizen where possible.

“All of these are elements that, because they’re alien to the majority of businesses and people working in Romania, need a huge push and we strive to demonstrate in practical terms what it means to implement good governance.”

One of the other ways in which Romania has been put on the map is with a recent OMV Petrom partnership with industry leader ExxonMobil, which in turn has boosted the international appetite for investment in the oil and gas sector.

“As one top official said, “Here we have the leader of the Romanian industry coupled with the leader of the global oil and gas industry” and that’s what I would say is the beauty of this partnership.”

What is also crucial about this relationship is that ExxonMobil’s international clout combined with OMV Petrom’s local expertise and know-how will see both parties exploring a series of new deep offshore targets and add to Romania’s already extensive oil and gas reserves. Although the project is still in the exploration stage, the partnership is indicative of Romania’s budding energy sector.

Provided that businesses in Romania adapt to market changes in much the same way as OMV Petrom has done, the energy sector will soon escape the trappings of a state-run economy and begin to enjoy the benefits of its newly instilled free market regime.

Brazilians are underprepared for retirement, says HSBC Fundo de Pensão

Posted on March 3, 2014February 28, 2014 by Ashton Wenborn

Based on the ninth edition of a research study into global retirement trends, commissioned by HSBC, over half (59 percent) of Brazilians think their financial preparations for a comfortable retirement are inadequate: 19 percent are not preparing at all, while 41 percent are not doing enough.

Brazilians understand the importance of preparing for retirement from early on in life – on average, they see the age of 33 as the latest by which people can start planning financially and still expect to maintain their standard of living in retirement.

The findings show that saving (putting money aside for the future) and financial planning (evaluating the current situation, identifying future goals and taking action to achieve them) start at varying and different ages. On average worldwide, retirement saving starts four years before planning for retirement starts, yet in Brazil both retirement saving and financial planning start at similar ages – typically 25 and 26. Although this is earlier than most other countries surveyed, the average figure hides the fact that 64 percent of Brazilian respondents have never saved for retirement, including 69 percent of 45- to 54-year-olds.

Tackling short-termism
One of the obstacles to retirement saving, according to the research, is the tendency to focus on the short term: immediate savings needs are more tangible and therefore may be given a higher priority than far-off goals like retirement. When asked to choose whether they would save towards a holiday or retirement, if they could only afford to save for one in a single year, Brazilians were more likely to choose a holiday, with 49 percent choosing this option compared with 43 percent choosing to save for retirement. This suggests that for many, short-term financial needs take precedent over longer-term financial priorities. In addition, Brazilians are willing to dig into their retirement savings as a means of dealing financially with an unforeseen crisis. 38 percent would look to their retirement savings to get through serious financial hardship. Alternatively, 29 percent would use other savings, and 30 percent say they would look for better-paid work. Taken together, this means that not only does putting shorter term savings goals first act to reduce contributions to retirement savings, the readiness to draw on long-term savings in an unexpected crisis will also act to lower the value of retirement savings for some Brazilians.

64%

Of Brazilians have never saved for retirement

On the other hand, there are many different reasons why people begin to save for retirement, though fear of financial hardship in retirement is by far the most common motivator, chosen by nearly half (45 percent) of research respondents. More positive developments such as starting work (seven percent), a promotion (nine percent) or getting out of debt (11 percent) are far less important triggers.

HSBC Fundo de Pensão believes that good communication with plan members is the key to promote financial education and retirement savings. Lectures are performed with plan members in order to explain the design of the plan, the different tax regimes and their impact over the accumulation period and upon retirement, as well as the characteristics of the investment portfolios available and the importance of starting early to save.

On the investment side, the year of 2013 was marked by a shift in investors’ expectations – interest rates ended 2012 at their lowest levels since 1995, and for the first time at one-digit levels, and the expectations were that the rates would remain at those levels or even drop and stabilise at lower levels. During 2013, the Brazilian Central Bank decided to raise interest rates, which reached two digits by the end of the year.

The fixed income market was one of the highlights of negative performance in the year, with the raise of both high nominal and real interest rates. The increase in pre-fixed rates in the US, along with the release of inflation figures in Brazil and the upward revision of expectations about the cycle of high interest rates in Brazil, determined that movement.

One of the obstacles to retirement saving, according to the research, is the tendency to focus on the short term

In the equities market, stock exchanges in developed countries have benefitted from the reduction in risk aversion, due to the improvement of the crisis in the eurozone and the dissemination of better than expected economic data, particularly in the US. Emerging countries, however, suffered from signs of a slowing Chinese economy, as well as the expected reduction in the purchase of bonds by the Fed and the consequent high rates of US government bonds (treasuries). Moreover, the domestic scenario remains complicated, with inflation being pressed, high interest rates and weak growth numbers, which keeps the drop bias in corporate profitability.

The shift in this expectation caught long-term investors by surprise. All these factors caused volatility in long-term investments, including those in retirement plans. In some cases, the instinctive reaction of retirement plan members was to withdraw their savings, losing the chance to recover the losses in the year, and giving up all the benefits they had in the past with very good investment performance.

All the volatility in Brazilian economy experienced in 2013 only reinforces the importance of starting to save early for retirement, as investment performance (good or poor) will smooth over time, in addition to the fact that capitalised financial resources make retirement cheaper to sustain.

Multi-sponsored funds
Other important factors are the fees charged, usually reduced from investment returns, which affect accumulation for retirement. The lower the fees are, the less they will impact accumulation negatively. In a multi-sponsored pension fund, where costs are shared among all sponsors, the negative impact on investment returns is significantly reduced. Summing that to the fact that higher assets allow better negotiation of fees, multi-sponsored pension funds have turned out to be a very attractive vehicle to save for retirement.

“At HSBC, we help people to plan financially for their future, both to realise their dreams and to help them protect against the bad times which sometimes threaten. We believe it’s important to understand our customers’ hopes and fears, and to provide them with options to develop effective financial plans for their future,” says Alfredo Lalia Neto, Chairman of the Board of HSBC Fundo de Pensão.

Marcelo Teixeira, HSBC Group Head of Insurance, says: “Life happens – we have families, our children require education, we have accidents, we accumulate wealth and we grow older. Our clients are individuals and businesses and we work very hard to identify and meet their needs through life, pension, investment and protection products.”

Founded 35 years ago, HSBC has assets of BRL 5.6bn and leads multi-employer funds with a 33 percent market participation rate. Its nearest competitor is far behind at 16 percent. HSBC has 200 sponsoring companies with their own pension plans, more than 80,000 active participants and in the region of about 9,000 retirees.

[W]e help people to plan financially for their future, both to realise their dreams and to help them protect against the bad times

HSBC gives its clients the opportunity to participate in its multi-sponsored pension fund, which is managed as a non-profit private pension closed entity. This allows for the joint management of separate private pension plans so that the features of every specific benefits plan are retained and remain appropriate to each company’s individual needs. Each plan has its own actuarial appraisal, enabling the identification of specific costs based on the profile of the staff that join the plan, and the benefits selected by the company.

The HSBC Multi-sponsored Pension Fund was the first independent fund of this type to be launched in Brazil, having been approved in December 1979 when it was first regulated and inspected by the Superintendência Nacional de Previdência Complementar. The fund made it unnecessary to invest in own administrative structures and corporate pension funds because the structure already exists, and is shared among sponsors of the pension fund.

Shared participation
HSBC’s plans are all independent. The results are individualised and all costs are plan-specific. As the fund reaches self-sustainability, costs are reduced for the company and all its plan members, allowing them to concentrate on their core business. The internal structure of the fund operates so as to enable the total participation of both sponsors and plan members within a policy of absolute transparency. This works through a mechanism known as the ‘three powers’, where the sponsor has the power to make decisions, the administrator is in charge of managing the fund and the plan member inspects and supervises operations.

“For HSBC, it’s not enough to offer the best corporate pension plans,” says Neto. “We also insist on [putting in place] specialised consultancy services to guide customers in their choice of the most appropriate products for their company. Our team is ready to assist through all the processes involved in the development, implantation and appraisal of our corporate pension plans. The solutions we offer are capable of meeting all human resource needs, in accordance with the company’s financial means. Many companies and foundations have chosen multi-sponsored funds, willing to avoid the high cost of maintaining a proper structure. That’s because the administration of assets and liabilities requires professionals fully dedicated to managing the day-to-day of a pension plan, which also involves legal advice, welfare, administrative, technological and actuarial work.”

There are many advantages to a company using HSBC’s Multi-sponsored Fund as compared with funds from competitors. The fund is Brazil’s oldest, and HSBC’s 35 years of experience administrating corporate plans is unmatched in the region. Customers can expect highly customised plans with relation to each individual company, complete with permanent assistance and specialised technical consultants at the ready.

HSBC Fundos de Pensão is a member of the Associação Brasileira das Entidades Fechadas de Previdência Complementar. It has also been selected by Associação Nacional dos Contabilistas das Entidades de Previdência as the being the best multi-sponsored pension fund in Brazil.

The fund’s administrative services are provided by HSBC Administração de Serviços para Fundos de Pensão (Brasil), while assets are managed by HSBC Global Asset Management, one of the largest managers of third party assets in Brazil.

Intense reforms shake Spanish pensions; Ibercaja responds

Posted on March 3, 2014February 28, 2014 by Ashton Wenborn

The Spanish pension fund industry is being affected by an intense reform of its public pension system, the so called ‘first pillar’. In the last three years, several laws have been approved which will have a long-term impact. In 2011, the ‘27/2011 Act on the updating, improvement and modernisation of the social security system’, was adopted. This law upped the retirement age to 67, and has changed the reference period for calculating pension benefits; it has increased the number of years of contribution required to receive the maximum allowance; and it has also tightened eligibility requirements for early retirement. The government’s aim has been to reduce future liabilities for public accounts by reducing the estimated coverage of the pension benefit over the last wage, to around 65-70 percent.

The higher rate of substitution by the pension payments of the last wage earned explains the relatively low development of the pension fund industry in Spain compared to other European Union economies (14 percent of the financial assets of households vs 36.9 percent in the EUR13, according to EFAMA). The expected reduction of such coverage due to the reforms suggests an attempt to increase the rate of savings in pension plans to approach the levels other EU countries (see Fig. 1).

Recently the government also approved the ‘23/2013 Act on regulating the sustainability factor and the revaluation index for the pension benefits of the social security system’. This rule delinks the annual pension increases from the inflation rate. It also provides for the implementation, in 2019, of a sustainability factor, which will relate benefits paid with life expectancy and with workers’ contributions within the same year.

In the current scenario, in which the public pension scheme is essentially a pay-as-you-go system with a very small trust to prefund it (it is estimated to run out of funds in 2020 if things do not improve) and benefits, future and present, are linked to worker contributions, it is no coincidence that the system is immersed in a debate over its long-term sustainability. A future with increasingly low public pensions brings up the need for families to plan for alternative savings that enable them to maintain their living standards after retirement.

Incentive review
The ‘Occupational Pension System’ in Spain, or the ‘second pillar’, is highly concentrated in certain economic sectors such as the civil service, utilities, banks and former public monopolies such as telecommunications or tobacco. Its development within the small and medium enterprise sector has been slow to say the least. At present, Employment Pension Programmes manage €33.5bn for 2.1m members and beneficiaries, only around nine percent of the Spanish workforce. While legislative changes to promote the sector have been promised, the last amendment of the tax code has actually worsened its incentives, removing the benefits that employees making pension fund contributions enjoyed in their payments to the social security system.

This law upped the retirement age to 67, and has changed the reference period for calculating pension benefits

Finally, the ‘third pillar’, voluntary personal pension plans, administered €58bn in 2013. These schemes displayed high annual growth rates until 2006, but from then on, assets under management have stabilised as a result of the loss of some tax incentives and by the recession experienced in the Spanish economy, which has significantly affected household savings.

At present, in Spain, contributions to occupational and personal pension plans are exempted from income tax. The annual amounts are limited at €10,000 for people under 50 years old and €12,500 for those over 50. The benefits are subject to income tax, though, so part of the fiscal saving is paid back during the retirement period. The cumulative savings can only be recovered in the event of retirement, disability, death, long-term unemployment or serious illness. The government is considering increasing the number of situations when it is possible to retrieve the money from the pension fund in order to stimulate the use of these investment vehicles. It is clear that developing the second and third pillars is critical, and this is where Ibercaja Pension’s efforts are focused. The company was formed in 1988, the same year pension plans were created in Spain. Having recently celebrated its 25th anniversary, it has become the sixth-biggest pension fund company in Spain (5.55 percent market share) with €5.1bn of assets under management and more than 240,000 clients.

About Ibercaja Banco

The Spanish financial sector underwent an intense process of recapitalisation and restructuring during 2012-13 in accordance with the Memorandum of Understanding agreed between the Spanish authorities and the EU. Ibercaja Banco has been one of the companies that has managed to meet the needs of the capital required without any public support, showing itself to be one of the most creditworthy entities in the country.The volume of activity in Ibercaja Banco amounts to €74.1m of assets. Its business focus is the retail market (primarily households), although in recent years it has been growing its presence in the corporate sector. Its financial arm, formed largely by the mutual fund manager, the pension fund manager and the insurance company, is recognised as one of its strengths.

Ibercaja Pensión and Ibercaja Gestión (the mutual fund company) have gained recognition from major fund rating agencies such as Standard & Poor’s, Morningstar, Lipper, AllFunds Bank and Interactive Data, and from Spanish newspapers Expansion and Cinco Días, and international brands such as Citywire. The company was also named the Best Pension Fund in Spain, 2014 by World Finance.

Taking decisions
Ibercaja Pension manages 25 personal pension plans with different investment profiles. The investment mandate is defined by the sponsor entity, in this case Ibercaja Banco. Our portfolio of funds includes fixed income, mixed assets, long only equity, alternative strategies and guaranteed yield funds. We have expertise in investing in private equity funds, mezzanine debt funds, long-short equity funds, commodity funds, real estate through private equity funds and forex relative value funds. We also manage internally what we call ‘dynamic funds’, which are a kind of flexible fund that introduces alternative strategies implemented through shares, derivatives, funds or currencies.

Through Ibercaja Banco and Ibercaja Pension, clients receive an initial assessment of what their savings need to be to complement the estimated public pension at their desired level. According to their age and risk profile, they are recommended one or more pension plans from those mentioned above. They are also informed of the tax implications of their contribution, and when the members reach their retirement age they are offered a personalised study of the best options to rescue the plan, according to their needs and tax situation. Transparency is very important for us, and customers receive updated information on results, costs incurred, fund characteristics and risks as time goes by.

The marketing process is very different in the case of occupation pension funds. The sponsor company, with the help of the trade union, sets up a control committee with representation from the company management and the workers. This supervisory board selects the asset manager and lays down rules on the contributions and benefits of the plan, as well as dealing with issues raised by members. Once the asset manager is selected, the control committee establishes an investment mandate where certain requirements are set, such as investment horizons, performance objectives, maximum risk levels, minimum and maximum exposures to each asset class, etc.

[T]he ‘third pillar’, voluntary personal pension plans, administered €58bn in 2013

Ibercaja Pension administers pension plans for the employees of Spanish electricity company Endesa, the Bank of Spain, Ibercaja Banco, the civil servants of Aragon’s Government (Ibercaja Banco’s most traditional area of influence) and for other cities. This makes our company the third-largest in Spain by assets under management in this area, with a 10.75 percent market share (up from 2.28 percent in 2003).

Ibercaja Pension has expertise managing defined contribution, defined benefit and hybrid defined benefit-defined contribution plans. It is also now immersed in a new co-management project with one administrating company and several investment entities including Credit Suisse, Blackrock and Santander Asset Management, a model not typically used in the Spanish market.

Occupational pension funds include socially responsible investing practises in their investment mandates. The implications for fund managers are relatively small at present, but it is a trend that has to be taken into account. In order not to be left behind, Ibercaja Pension decided to incorporate socially responsible criteria into its investment process and has been a signatory of the United Nations Principles for Responsible Investment since 2011.

Risk control is a very important part of our philosophy as asset managers: management, fund managers, middle office and the control department are all involved in monitoring it. The control department is independent in its analysis and reports on any issues directly to the board of directors.

Furthermore, even though Spanish law allows the investment entity and the security custodian of a pension fund to belong to the same financial group, it is good practice for these companies to be independent. The custodian has control duties which can be more strictly conducted when it does not share an owner with the investment entity. For this reason, most of the funds that Ibercaja Pension manages have custodians who do not belong to Ibercaja Banco’s financial group. This is a format that is becoming more and more common in the Spanish market, although some of the biggest financial groups do not yet follow the practice.

Challenges ahead
In our view, the two more important challenges for the Spanish pension fund industry are the globalisation of financial markets and the reform of the public pension system. In Spain, it is expected that, as the economy recovers, demand for pension plans by families and workers will grow significantly. In this context, Ibercaja Pensión has a professional and solid company model to turn that need into a business opportunity. Being a midsize company in terms of AUM, though, it cannot be a specialist in all the global financial markets, which are more and more interrelated, but it has access to multiple financial intermediaries who cover any possible need. On the other hand, its size gives it the flexibility that bigger organisations lack. So we think Ibercaja Pension has the control systems, the capabilities and the knowledge necessary to cope with these and other challenges.

We always try to be dynamic in the way we manage our funds, changing the geographical composition of the portfolios, introducing new investments, and adding new layers of control to avoid any operational or financial risk, and so on. Results are on our side, but we know that the market changes every day and we have to change with it.

Technology boosts Islamic finance; ITS provides solutions

Posted on March 3, 2014February 28, 2014 by Ashton Wenborn

Islamic finance is on the rise, gaining prominence across the world, thanks to a number of sharia-compliant institutions achieving increasing acclaim within the global banking industry. However, many banks still find themselves falling short and need to accelerate their efforts to meet the technological and global challenges that they are likely to face.

The UK Islamic Finance Secretariat (UKIFS) indicated recently that Islamic finance assets worldwide continued their upward trend to reach $1.46trn by the end of 2012. Considering the growth experienced in 2013, the market expects it could top $2trn in assets by the end of 2014. These findings demonstrate that Islamic finance has shown strong resilience despite the slowdown in the global economy and the pressure on conventional banking in Western countries. In fact, global Islamic finance assets have doubled since the start of the economic downturn.

Within the GCC specifically, Islamic finance commands an estimated 25 percent share of the banking market. However, for many Muslims and non-Muslims alike, Islamic finance is still a concept that is clouded by unfamiliar terms and principles, which often leads to confusion and hesitancy. To those without an Islamic or banking education, concepts such as riba, mudarabah and sukuk require a lot of explanation (see Fig. 1), but many more people are taking the time to understand their meaning.

A report released by Ernst and Young projected that by 2015 the MENA Islamic banking industry will be worth $990bn as the uptake of Islamic banking surges, more than double the 2010 figure of $416bn. With such a vast increase in growth on the horizon, many are asking the question: what is it that is causing this boost?

One of the core foundations of Islamic finance is the promotion of itself as an ethical system

Tangible assets
Islamic banking’s popularity is attributable to many different factors, but one thing is certain; the growth would not have been possible without the deployment of contemporary financing techniques or structures that underpin the industry. Take sukuk (Islamic bonds), for example (see table); they can be seen as a union between religious principles and modern financing techniques. In light of the recent banking crisis, it is understandable that sukuk are now seen as a more tangible investment than a conventional bond, as the owner has a stake in the underlying asset rather than a share of the debt.

One of the core foundations of Islamic finance is the promotion of itself as an ethical system. Islamic banking is set up in accordance with the principles of sharia, the morale code and religious law of Islam. Many of its rules have been specifically laid out with business and trade in mind, an important aspect, which has attracted the eyes of many small- and medium-sized enterprises.

The main difference between a Western high street bank and an Islamic one is that Islam prohibits investors from making money from simply lending it. This means that customers with an Islamic savings account or current account are not paid interest on their deposits and borrowers with an Islamic mortgage do not pay interest on their debt.

Technology boost
Because banking practices differ from region to region, the significant growth experienced by Islamic financial institutions has demanded diversified technology that supports both traditional and Islamic banking on the same platform.

Islamic banks tend to view technology in the same light as their conventional counterparts do, but Islamic institutions can often end up with the realisation that there is a total scarcity of systems that cater specifically to their Islamic principles. By utilising the right technological solutions that are on offer, a bank can quickly react to the demands of its customers by introducing new products and reducing the turnaround period required to bring them to market.

For many years Islamic banks have tended to adopt technology solutions from specialised vendors, which offer dedicated solutions. Traditionally, these vendors have been small and did not have the funds to meet the increasing sophistication of the bank’s needs. When Islamic financial institutions were starting up, they too were small and needed to penetrate the market quickly with minimal technology spend; however, over the years the customers of these Islamic banks have grown in sophistication and what they demand from their bank has developed in line with this. Islamic banks now need to be better equipped with state-of-the-art technology support in order to compete in the market, providing solutions from larger technology vendors that are capable of supporting the developing needs of Islamic banks, moving far beyond simple automation. They are expecting technology to assist in creating products in a short time, attracting and retaining customers by offering the best service possible.

As Islamic financial institutions develop, technology is becoming a key enabler for future business. Islamic finance institutions offering sharia-compliant products need a dedicated end-to-end Islamic banking system that facilitates and automates sharia-compliant banking operations and enables banks to scale up their operations to meet global competition, grow market share, retain the loyalty of their customers and, above all, enhance their profitability.

Maximising growth
International Turnkey Solutions’ (ITS) ‘ETHIX’ suite of financial products provides Islamic banks with a comprehensive total banking solution that is widely recognised as one of the most flexible and scalable technology solutions worldwide. Developed in accordance with sharia guidelines, ETHIX empowers Islamic banks to improve operational efficiency and reduce cost of ownership in specific areas of Islamic banking, while maximising opportunities for growth.

It offers an integrated and comprehensive system for financial institutions and banks to deliver sharia-compliant products. ETHIX is in full compliance with the Accounting and Auditing Organisation (AAOIFI) and International Accounting Standards (IAS).
As a standalone module, it is easy to integrate and offers full support through its back-end accounting functionalities with straight through processing (STP) built on an SOA platform and a web services based model.

ETHIX offers a complete repository of industry-specific products and functions for Islamic finance and investment, core banking, delivery channels, trade finance, branch automation, online banking, dashboards and comprehensive reports in addition to other banking services.

Global Finance Solutions, part of the ITS group, has been in the region for over 30 years, gaining a breadth of ethical banking knowledge and experience, counting many of the leading Middle Eastern and global Islamic financial institutions among its wide portfolio of customers.

AMAC Aerospace private jets become second home

Posted on March 3, 2014February 28, 2014 by Ashton Wenborn

As the regions stimulating global economic development become increasingly diversified, with the BRIC countries gaining traction and the newly emerging MINT (Mexico, Indonesia, Nigeria and Turkey) countries rising in the international business landscape, the need for convenient, efficient, safe modes of transport serving executives, driving business forward, is imperative.

Private jet charter or ownership is often the most efficient and time-saving option that cash-rich but time-poor senior executives have; one which guarantees them efficient access to the growing number of business regions. Executive aviation now supports a wide variety of business travellers who utilise these valuable business tools as more than just a means of transport.

More business people crossing continents on a regular basis means an increasing number of business jets are serving as offices in the sky. In many cases they are a second home for the international entrepreneur. Hub and spoke commercial aviation dominates the skies yet rarely provides all the necessary direct connections.

According to the European Business Aviation Association (EBAA) in 2011, 96 percent of city pairs served by private aviation had no scheduled connection. While advanced technology supports video conferencing, the EBAA notes that 66 percent of corporate decision makers regard face-to-face meetings as critical to M&A success. There is nothing like sitting with new business colleagues to really learn about them.

Face-to-face business
Time is a finite commodity for these executives. Jets reduce unnecessary waiting times at airports, offer direct routing and allow for comprehensive schedule changes. More importantly, they provide the security to discuss high-level deals and a quiet space to contemplate the next meeting while mapping out ideas with colleagues. A route that has seen significant growth over the past year is China to the Middle East through Africa to South America.

Any passenger travelling the hours these journeys require welcomes an intelligently specified interior that offers not only comfort but office space with connectivity. Business jet completion centres are increasingly facing the challenge of providing a workspace in the sky combined with a comfortable home-from-home interior. One of the leading players in the business is AMAC Aerospace.

AMAC Aerospace

2007

Founded

15 Aircraft

$1bn

Worth of business undertaken to-date

600 Size of workforce

The company has developed a business expertise in creating just the right environment for clients, including members of the Fortune 500, heads of state, royal families and international entrepreneurs, among other high-net-worth-individuals. Established in 2007, it is located at EuroAirport Basel-Mulhouse-Freiburg, Switzerland and specialises in both aircraft maintenance and completions, and through its Zurich based business – AMAC Corporate Jet business – it also provides aircraft charter and management with a combined portfolio of 15 aircraft under AMAC management.

The founders, including Group Executive Chairman and CEO Kadri Muhiddin, have strong heritage in the sector, and genuinely understand what owners require in terms of reliability. In response to these needs the founders recognised that reliable completions offering best in service quality, delivered on time and within budget, were a valuable resource for the private aviation market.

Complementing this, the capacity to keep aircraft fully maintained ensures efficiency and best use of the asset for the owner. The family run, privately owned business chose the acronym AMAC as the letters represent Aircraft Maintenance and Completion which succinctly describe the core competencies of the business.

Its Swiss facility now boasts three hangars, suitable to accommodate wide-bodied aircraft. The bare airframe is delivered on the customer’s behalf to AMAC where it finishes the aircraft, taking into account the bespoke requirements of the owner, while fitting all furnishings, technology and completing some paintwork.

A strong fleet for greater demand
As the distance between business centres expand the demand for longer range aircraft is increasing, and AMAC has positioned itself to serve this market. It has approvals from major aircraft manufacturers Airbus and Boeing to undertake completions and maintenance on the A320 series, A330s, A340s, ACJs (Airbus Corporate Jets), BBJ’s (Boeing Business Jets), B777s and B747s.

It has the capacity to work on short- and mid-range aircrafts, but at its heart is the growing skill-set required to provide highest quality completions featuring the latest in design, comfort, and connectivity.

It can also support the market end-to-end from a maintenance perspective, and has recently become the first European company to complete a 16-year heavy maintenance check on a Gulfstream V, which involved taking the aircraft back to its skin to carry out a complete structural and maintenance check. AMAC also recently performed its first wide body maintenance project on an Airbus A340, which went without incident proving the company’s ability to take on any request.

Jets reduce unnecessary waiting times at airports, offer direct routing and allow for comprehensive schedule changes

Insurance, Air Operating Certificates (AOCs) and general equipment safety rely on detailed maintenance checks to ensure security and efficiency of the operational asset for the owner. This is integral to business continuity as if the aircraft undergoes unnecessary down time this is costly for the owner, and can disrupt international business schedules.

AMAC Aerospace is proud to be the largest family run business in private aviation anywhere in the world. Basel-Mulhouse was selected due to its a central location for an established business aviation market in Europe, in addition to recognising the importance of the growing markets of Russia, the Middle East, which is relatively a young sector in business aviation terms, as well as providing service to North Africa and further south into the Sub Saharan regions.

To further support these markets, in September 2012 AMAC Aerospace opened AMAC Aerospace Turkey, reflecting the vision of the founders. Turkey is now part of the MINT economic group and as a location perfectly serves the Middle East, India and the burgeoning Eurasian market.

With orders for the next two years, AMAC is in open dialogue with other potential clients and has undertaken over $1bn worth of business since forming as a organisation. As a result, management is exploring the option of a fourth hangar purchase at its home base which will underpin maintenance of wide-body VIP aircraft, an area of the market that is rapidly developing due to the economic global stretch.

Currently, 65 percent of the work is completions based, but the company is hoping to balance this to a 50:50 split within the next 12 months. AMAC aims to offer lifetime service to the aviation sector from initial completion through to the long-term heavy maintenance checks.

One of the biggest challenges AMAC faces is to provide a working environment that is comfortable and practical for the owners of the jets. This means the designer has to consider many elements when designing the interiors. Alongside the cabinetry, soft furnishing, and full size double beds, the company also installs state-of-the-art cabin management systems to support crew activity, and what has arguably become the most important part of any cabin completion project: a full-scale communications suite and complementary Inflight Entertainment system.

The need for effective connectivity has become a leading part of the design process. The capacity to make calls as if you were on the ground and the need for speedy and reliable internet access and all office amenities for tablets and smart phones is integral. These tools develop with such speed that AMAC often has to predict what the client will need before the product even exists.

Entertainment systems evolve so fast and therefore the company is currently working on the design and implementation process for the installation of high definition screens for 3D viewing on board. It has full in-house capability for installing all of these vital elements, in addition to the capacity to update them as quickly as the systems change.

Having built a reputation for focusing on detail, the recent interior of an Airbus Corporate Jet ACJ319 saw it furnished with soft, high quality leathers, specially selected wood veneers and an attractive decorative cabin door inlaid with carved mother of pearl and wood marquetry panels.

A home away from home? AMAC Aerospace private jets are designed to provide cash-rich, time-poor executives with a comfortable home office in the sky

This may sound opulent but in an environment that is invariably the owner’s second home, these details matter. Clients need to know that they will have a comfortable space to live in, combined with an efficient working environment.

Since its launch AMAC’s rapid growth reflects the founders’ extensive network of contacts and their intuitive vision to develop markets. The VIP aviation market is relatively compact so networks are essential for success and AMAC continues to deliver what these demanding customers expect.

The customer portfolio extends way beyond Europe as the company has approvals from the authorities in Brazil, Russia, Aruba, Bermuda, the Cayman Islands, the Kingdom of Saudi Arabia, Qatar, Oman, the UAE, Cameroon, Nigeria and Chad, to name a few, and to carry out maintenance operations in Switzerland.

Today AMAC employs a talented workforce of over 600 people who have built a unique set of skills for an expanding sector of the aviation market. As the world extends from a business perspective, AMAC Aerospace is as well positioned to serve the established business regions as it is to work with those in emerging destinations such as Nigeria, Brazil and Indonesia.

While currently the largest part of its client base is in the Middle East, these new markets are becoming as interesting as those with established wealth. The clients from these areas now demand prestigious aircraft with elite finishes flying into the heart of Africa and on to Russia, Brazil and further afield. As the world’s economic barometers change, AMAC is ready to support and develop with them.

Dr Kamal Munir on whether people’s confidence in microfinance can ever be restored | Video

Posted on February 28, 2014March 6, 2014 by Ashton Wenborn

Microfinance was once considered a revolutionary tool, that would end poverty and empower communities. But tales of borrower suicides and the exploitation of the poor have tainted its image. Dr Kamal Munir from Cambridge Judge Business School, a lead professor of social change and stability, discusses why microfinance is disappointing the developing world and whether there’s a better alternative to it for the world’s poor.

World Finance: Well Dr Munir, there were such high hopes for microfinance. But five years on, why is it said to have disappointed the developing world?

Dr Kamal Munir: So how did we get from the ultimate panacea for global poverty alleviation, to what we see now? I think at least three things happened. As we scaled up and donor money dried up, more private capital came in, looking for returns on this. Now, it is one thing to engage in rhetoric suggesting that everyone, all poor women in the world, are entrepreneurs, but quite another to actually make them so. The mortality rate among small businesses is particularly high, so it was never really going to succeed. So one thing was, during scaling up, as subsidies went away, as operations got bigger, the whole thing simply transformed into what we call minimalist microfinance. Another thing was mission drift. Very quickly, people realised that the poorest were not always the most credit-worth people, so they shifted from the poorest to what they call poor. So the average loan size in this industry has been gradually going up.

The mortality rate among small businesses is particularly high, so it was never going to succeed

World Finance: Microfinance has received a lot of criticism for imposing debt, with some people even going as far as to say that some institutions are profiting from the ignorance of the poor. Well surely this is just about institutions profiting from some of the world’s poorest people?

Dr Kamal Munir: The majority if the assets that are being held in this industry are being held by banks now, who are looking for profits. The costs do tend to be high. If you are going to give out a loan to let’s say 10 people, and the loan size is £100,000 each, you only have 10 people to process. Now you could be dividing that amongst 1000 people, then the processing costs goes up. So the operational costs in microfinance do tend to be high. But still, they should not more than 10-15 percent of the cost of funds. What we see is much more than that, which actually falls into loansharking, which means that we are in the territory where people are making profits off the back of the poorest, the most vulnerable, needy people in society.

World Finance: One of the most contentious areas of microfinance is the level of interest on the loans as we just spoke about, so what happens if they can’t pay?

Dr Kamal Munir: What is supposed to happen is that they will be denied a loan in the next cycle, or there will be peer pressure exerted by the group, because it’s all based on group lending. What happens is, in order to escape that kind of pressure, in order to retain my social capital, I will try to go out and borrow from the village feudal lord, or the money lender, or somebody else in the village, and what often happens is that slowly I will exhaust all the different sources from whom I can borrow, or I will borrow on a short term basis from someone at very high interest rates, and I will get into a vicious cycle of debt.

[P]eople realised that the poorest were not always the most credit-worth people, so they shifted from the poorest to what they call poor

World Finance: Do you think that microfinance concept then can be revisited to work better?

Dr Kamal Munir: If we are looking for poverty alleviation, we should know that so far the impact on poverty has been zero, off microfinance. And secondly, where poverty has been alleviated, has it been alleviated because of the success of microfinance, or has it been alleviated because of other reasons? So, for example, the alternative could be job creation. Countries that have pulled themselves out of poverty have done so by industrialising, by creating jobs, and the logic is simple to grasp. Because let’s say I give out one loan of £100,000 to one person, who sets up a stitching centre, or a factory to make garments, and employs 500 women there as stitchers. On the other hand, I give out loans of $200 each to let’s say 500 women. Now, which venture do you think has a higher probability of success?

World Finance: Well finally, are there better alternative to microfinance for the world’s poor?

Dr Kamal Munir: Micro-enterprises normally are businesses that help somebody survive, if that. And they do not generate employment, and they don’t produce enough returned earning which can be reinvested in the business and the business can be grown. So I think we would be much better off focusing on small and medium size enterprises.

World Finance: Dr Munir, thank you.

Dr Kamal Munir: Thank you very much.

EBRD’s commitment to infrastructure investment

Posted on February 28, 2014February 27, 2014 by Ashton Wenborn

How to pay for infrastructure investments is a vexing issue in developed and emerging markets alike. It is also a top priority for both the public and private sectors, with widespread acknowledgement that the quality and robustness of infrastructure are key factors that affect all countries in a globalised investment landscape.

Economic growth also hangs in the balance. According to recent global analysis by BCG, an increase of $1trn in infrastructure investment worldwide would unleash approximately $1.5trn in additional economic activity each year. Furthermore, a major Africa-wide study – Africa’s Infrastructure: A Time for Transformation, by the World Bank – concluded that a doubling of infrastructure investment levels on the continent (from $45bn to $90bn per annum) would boost GDP by 2.2 percent.

Infrastructure investment not only stimulates economic activity in the short-term during construction, but also drives secondary job creation in the private sector as economic competitiveness improves. Despite being widely acknowledged by governments and the private sector, not enough infrastructure investment is occurring globally.

Regardless of the financing modality chosen – public-private partnership (PPP) or traditional public sector financing – there are three basic commonalities present in all successful infrastructure projects:

A strong underlying business case, generating an economic return through sufficient, lasting demand for the new or refurbished infrastructure;
A robust project structure to achieve bankability, legal enforceability, political and social buy-in and environmental compliance;
Sustainable funding sources, either from user charges alone or in combination with predictable, stable and credible public sector support.

Based on the European Bank for Reconstruction and Development’s (EBRD) experience over the past 20 years, infrastructure projects containing these elements will attract ample financing.

Approach to financing
The EBRD has broad and varied experience involving infrastructure projects using various forms of private sector participation (PSP) approaches, encompassing both PPPs and projects funded with the public sector according to the user pays principle, typically using the public service contract (PSC)/public service obligation (PSO) model. Over the past 15 years, the EBRD has funded some 40 PPPs in the infrastructure sector, including water/wastewater systems, roads, airport terminals, urban transport, district heating, ports and national rail. To date, it has financed €2.3bn in direct private sector financing. These projects leveraged an additional €3.5bn in other private financing from commercial lenders or other co-financiers. The demand for PPPs in the EBRD region remains steady, and has persisted throughout and beyond the 2008-09 financial crisis. In fact, certain countries, such as Russia and Turkey, are planning large pipelines of infrastructure projects.

[T]he quality and robustness of infrastructure are key factors that affect all countries in a globalised investment landscape

Using the PSC/PSO model, the EBRD has financed some 375 projects across the water/wastewater, urban transport, rail, district heating and solid waste sectors, totalling approximately €6.3bn. Importantly for the municipalities and ministries of finance, these projects are typically structured as non-sovereign, off-balance sheet in respect of the municipalities/sovereign, with the municipal utilities (or national transport operator) acting as borrowers. While full-cost recovery tariffs are pursued wherever possible, when public subsidies are necessary based on policy or affordability grounds, performance-based contracting holds the management of these public utility companies accountable under the PSCs/PSOs. This PSC/PSO model has proven resilient over the past 15 years, having withstood serious crises, including the fallout from the financial crisis.

The funding challenge
Infrastructure competes with other social and economic priorities for public resources. In this context, governments in both emerging and in OECD countries find it increasingly difficult to reconcile the financial demands for infrastructure financing based on tax revenues or state borrowing with the need for fiscal sustainability and the urgent need to reign in public debt levels. The ability of governments to deliver infrastructure by means of conventional direct borrowing or funding, known as the ‘general revenue model’, is consequently diminishing rapidly.

It is often not the lack of financing for infrastructure that is the problem – testified by the numerous and very substantial multi-billion dollar private and public infrastructure funds that have been established over the past decade, and that remain, in many instances, under-utilised or even largely undisbursed. Clearly, there are other, more fundamental, issues at play; namely, the lack of properly robust funding mechanisms and the lack of adequate project preparation.

A key issue for accelerated infrastructure development is the ability to pay for infrastructure and its operation. Only if a project has clarity and reasonable predictability of funding sources for capital expenditure and operation and maintenance can issues such as financing and delivery modality be tackled successfully. As such, the funding issue is at the heart of an accelerated infrastructure delivery. Politically, this is also the most uncomfortable issue to address. The easy option of funding through general tax revenues (clandestine funding) has been largely exhausted in most countries. Also, the failure of PPPs to make a larger contribution to worldwide infrastructure delivery can be explained to a significant degree by an inadequate funding basis. Even countries that are most active in using PPPs (such as Chile, Taiwan and the UK), only manage to fund between 10-15 percent of their entire infrastructure investments through PPPs.

Determination to deliver a piece of infrastructure must therefore be coupled with security and sustainability of funding sources. If a credible and strong mechanism to deliver payments is lacking (for example, fare box/user charges, government payments, payment enhancement/guarantee mechanisms, value capture mechanisms, or some combination of all three), the private sector will not engage as developer and financier of infrastructure projects.

It follows that there are certain necessary conditions for accelerated infrastructure delivery, namely the increased application of the ‘user pays’ principle to complement government funding; the need to find and apply realistic complementary means of financing; and the need to roll out solid contractual payment arrangements between the public sector and operators (such as PSCs/PSOs).

Case study: The Romanian water sector

Once robust funding approaches are established, successful examples of systemic uplift of investment levels in infrastructure occur. Concrete examples of the application of increased – but affordable – user charges are well documented. For example, in Romania’s municipal water sector, over the past 15 years, gradually increased user charges have led to significant capital expenditure investment in the modernisation of the country’s water and wastewater sector. The EBRD has been involved in Romania’s water and wastewater sector since the mid-1990s, and the sector-wide revenue growth has increased from approximately $400m in 1994 to approximately $1.4bn by 2011 in real terms. Hence, some $950m in additional revenues is now being collected annually by the country’s water operators compared to the pre-reform situation in 1994.

It is important to understand how this level of revenue growth – which was based on sustained tariff rate increases well above inflation rates – was achieved. First, as a matter of principle, the tariff increases were instituted in connection with the commencement of civil works to modernise the underlying infrastructure, and not once the water service actually materialised 24 to 36 months following the completion of works. Using this method, the water companies and local political leaders informed water customers that the civil works under the roads and at the water plants needed to be paid for primarily by users, and that the works would result in improved service.

When service quality did improve substantially over time, the utility companies gained the users’ trust. The rise in water tariffs has continued to the present day. Today’s average tariff of nearly $1.50 per cubic meter represents a 900 percent increase in real terms since the mid-90s, and yet tariffs remain affordable for most households. The utility companies have flourished as businesses, with many now running healthy cash surpluses. Using a conservative financial gearing ratio of 3:1, this means that the water sector’s operators are now able to make additional capex investments of $3bn versus the pre-modernisation situation of the 1990s. This level of self-financing capability, created over time by improving the underlying funding of municipal infrastructure, is the ultimate test for any multilateral development bank.

Value capture mechanisms
Another source of funding that is increasingly being used internationally is the application of value capture mechanisms, of which there are two main forms: a) a single lump sum payment by the private sector, typically property owners, developers, and/or commercial interests, made up-front (or during construction) to the public sector to offset some of the cost on the public purse of the new infrastructure; and b) an ongoing funding mechanism, which requires recurring payments by the private property owners in the form of location benefit levies, tax increment financing, betterment taxes/special assessment districts, and ‘joint development’ approaches, whereby commercial space is leased out by the infrastructure owner in the vicinity of the new infrastructure. However, value capture is no panacea in the infrastructure space: the first form requires that the public can effectively assemble and group land for development and apply an acceptably assessed increase in land value prior to the infrastructure’s implementation (Hong Kong’s metro system is the best known example, where more than 50 percent of all revenues to the metro company come from value capture at new rail stations); while the latter requires a properly functioning land/property tax system, which remains uncommon in many emerging market countries. London’s new Crossrail line is being partially paid for using a special increase in business property tax levied since 2011 for the next 24 years on all businesses in Greater London. This is projected to create a fresh revenue stream of £4.1bn of a total of £16bn for the new line. The new funding is being used by the Greater London Authority to service the bond obligations that the GLA has taken on to contribute to the project alongside national government financing.

Despite these limitations, particularly for the transport/urban transport sector (such as urban rail), value capture approaches represent the potential to create a broader pool of projects than would otherwise be possible.

Project preparation
The second bottleneck for infrastructure delivery is the difficulty the public sector has in creating a sustained delivery framework to prepare projects adequately and efficiently. This impacts on the pace of delivery for public infrastructure projects in general, and often makes the development of more complex PPPs impossible.

A sea change must occur in the way project preparation is supported and managed. International financial institutions have a role to play in this. Clearly, a greater number of projects must be properly prepared and structured to become bankable in order to change the dynamic of investment levels. From the EBRD’s point of view, while infrastructure financing needs are high, true progress will not be made in reducing the much-discussed investment gap until the project-related ‘institutional gap’ is addressed. For this to occur, comprehensive technical assistance and institutional strengthening is required, where the goal should be to build a critical mass of local experts in the public sector who are able to present well-structured projects to the market on their own accord using their own internal capacities. This is the ultimate litmus test over the medium- to long-term for the effectiveness of any IFI or bilateral donor.

The EBRD’s experience since the early 1990s working in Eastern European economies has shown that well-structured and well-prepared projects will find financing. With a greater focus on selecting projects with a sound business case, underpinning the investment with revenue generation from users, and the use of sound regulatory tools such as public service contracting, a systemic uplift in infrastructure investment can occur. With the right type of support and approach we believe that this experience can be replicated in other emerging market regions.

Iberdrola’s commitment to sound corporate governance

Posted on February 28, 2014February 27, 2014 by Ashton Wenborn

Over the past few years, investors and stakeholders have become more attuned to the importance of corporate governance, demanding that companies recognise their responsibilities to the communities in which they work and the many people affected by their actions. Companies today are required to implement good governance and responsible initiatives across all they do if they are to be considered successful.

“Good governance requires a constant effort to communicate governance policies to all your stakeholders and not just investors,” says Ignacio Galán, Chairman of Iberdrola. “Corporate sustainability and responsibility should be embedded in every aspect of the company’s life. It’s not just about talking but about doing.”

The company is a model of industrial success that has prioritised clean energy and has generated value for its shareholders for more than a century. “We believe that a common sense of belonging and trust results in a much higher productivity,” says Galán. “Without ethics and corporate governance practices, it would hardly be possible to align employees with business goals and it’d be impossible to run a successful business. Therefore, we need good governance and we need our employees to believe in corporate social responsibility. Although management teams lead changing processes, it is actually the employees who implement those changes and their adaptability that delivers.”

This focus on matters of corporate governance has had a profound impact on the energy industry. Whether it stems from governments, regulators, stakeholders or communities, companies are subject to unrelenting scrutiny from all angles. “It is in the industry’s best interest to be as transparent as possible,” says Galán.

Energy leader
Iberdrola is the leading electricity utility in Spain by market share, and has established itself as one of the main operators in the UK and the US, where company investments have increased three fold over the last five years. It has consolidated its leadership position in Brazil, through Neoenergia and the acquisition of distribution company Elektro, and is also Mexico’s largest independent power producer with more than 5,000 megawatts (MW) of generating capacity that will be increased significantly in the coming years (see Fig. 1). With total assets worth $30bn in the US, Iberdrola is the country’s second-largest wind power producer and provides electricity and gas to a population of six million throughout New York and New England.

In addition to Iberdrola’s extensive industry experience, corporate governance has played an important part in driving the company’s longevity. “Given that Iberdrola is over a century old and engages in a very traditional and mature line of business, an emerging trend in corporate governance towards the end of the 20th century posed important challenges, which we continue to find responses to,” says Galán.

The Bilbao-based energy utility is a private sector company whose focus lies primarily on energy generation and distribution, with an emphasis on security of supply and high quality service. Based on market capitalisation alone, Iberdrola is among Europe’s top five energy providers.

With an overall workforce of 30,600 employees, the company has a generation capacity of some 46 gigawatts (GW) serving 100m people worldwide. However, what really differentiates Iberdrola is not the scale of its business but its diversified generation mix.

“Iberdrola’s commitment to environmentally friendly energy sources has consolidated us as the world leader in renewable energies,” says Galán, in reference to the company’s 24,000+ MW renewable capacity; mainly wind and hydro assets. “Of the total generation capacity, 60 percent is free of greenhouse gas emissions, and the environmental policy of the group has positioned us as number one in this space, according to the Dow Jones Sustainability Index.”

Environmental responsibility
The energy industry has suffered its fair share of criticism in recent years, especially with regards to carbon emissions and pollution. However, Iberdrola has demonstrated how it is that industry leaders can address longstanding environmental concerns by employing forward-thinking initiatives and a responsible company culture.

“Sustainability is part of Iberdrola’s DNA,” says Galán. “Here we have a holistic approach to sustainability and aim for long-term consumer, shareholder and employee value. We believe that sustainability is not only related to environmental issues, but also to how the entire business operates and its impact on society, and that sustainable development has to be implemented through responsible principles and practices, while taking into account the needs and expectations of our shareholders.”

Iberdrola’s sustainability initiatives extend to the communities in which it works, as well as the company’s hundreds of thousands of shareholders worldwide. Galán believes transparency to be a crucial part of Iberdrola’s policy, and sees independent input as an effective way of identifying how the business is performing, “as it is independent parties who approve our sustainable footprint as a whole.”

“In terms of environmental achievements, we are a world leader in wind energy and a heavy investor in new technologies,” he says. “We have a fund called Perseo, which invests in start-ups dedicated to research and development in new energy generation technologies as well as those allied with the objective of global carbon emissions reductions.”

It’s not just about talking but about doing

Iberdrola’s continued efforts have seen the company take a prominent place in the Dow Jones Sustainability Index and the Carbon Disclosure Leadership Index. And in keeping with its strict environmental initiatives, the company has outlined a pledge to keep emissions per kWh at least 20 percent below that of the anticipated European electricity average in 2020.

In the period through 2003-13, Iberdrola allocated €25bn to the development of green energies, which represents the highest figure ever invested by a company in this field, on the basis of known data. Based on this short history of sustainable investment, Iberdrola’s commitment to a more sustainable world and an economy that creates value for the community is plain to see.

Factors for success
Galán is quick to dismiss Iberdrola’s industry expertise as the company’s single most important measure of success. “Longevity is indeed an indicator of a successful and sustainable project, but it’s certainly not the only one. In order to increase our chances of evolving and growing all the time, we need to have a strong identity, adapt to an ever-evolving environment, and balance our relationships with people and institutions both inside and outside the company. We have engaged in a process of continuous improvement in corporate governance processes and practices, and I think the company has reached a commitment to its shareholders, many of whom are pensioners who have trusted their lifetime savings.”

Iberdrola is one of Spain’s most active companies in terms of shareholder engagement, which is something the group prides itself on. In recent years, Iberdrola has implemented the best practices of corporate governance, which is reflected in the composition of the company’s governance bodies.

Total transparency
Iberdrola’s board of directors has experienced its fair share of changes over the past 20 years. Back in 1991, after the merger of the two companies that formed Iberdrola, the board consisted of 38 members. Fast-forward to the present and the board now seats 14 – of whom 10 are independent parties from four different nationalities – and includes four women.

The company’s Appointments and Remuneration Committee ensures that nominees are upstanding and qualified persons widely recognised for their expertise and competence, seeking to ensure that the selection of candidates results in an appropriate equilibrium of the board that enriches decision-making and contributes multiple points of view. Also, to counterbalance the role of the executive chairman, Iberdrola appointed a lead independent director in 2009, who was endowed with the powers to call board meetings, include new items on the agenda, and coordinate non-executive directors.

The company’s reputation with regards to corporate governance is unparalleled in Spain

“The board is continually reviewing and enhancing its corporate governance processes, with the aim of providing total transparency,” says Galán. And the communication between corporation and shareholder extends further still. “We encourage the participation of all shareholders,” he says, “so that we can gain a thorough understanding of our shareholder base. We believe that providing a sound basis for pro-active shareholder engagement is fundamental for the continued success of the company.

“Today, more than 650,000 retail and institutional Iberdrola shareholders throughout the world have invested in our company, and in return we offer them a model that is reliable, predictable, sustainable and profitable. We are an independent company that is not controlled by any particular shareholder, and instead, all shareholders are the central figure in Iberdrola’s corporate governance system.”

The company’s reputation with regards to corporate governance is unparalleled in Spain, best evidenced by Iberdrola being the company with the fewest votes against board proposals of all the blue-chip index Ibex-35 constituents.

Iberdrola’s commitment to matters of corporate governance shows an awareness of how decisions made by corporates can affect individuals on a global scale. The answer to a sharpened focus on matters of governance, says Galán, “is engaging with all shareholders, and allowing them to participate in key decision-making processes.”

Boris’s advisor insists Western economies must embrace change | Video

Posted on February 28, 2014February 28, 2014 by Ashton Wenborn

The EU and UK economies are said to be improving, but much change is still needed in order to cement a stable future, says Gerard Lyons, the Mayor of London’s chief economic advisor.

World Finance: Well Gerard, what do you look for to gauge the strength of the economy?

Gerard Lyons: There’s a whole host of different factors, the quantitative measures are very important, we have economic statistics about the current state of play. But also you need to actually dig a bit deeper and look at the underlying structure of the economy, because we not only want an economy to do well in terms of the near-term, the cyclical factors, we very importantly want the economy to be resilient and sound for the future.

[We] want the economy to be resilient and sound for the future

What this crisis did highlight is the disparities both within cities and across economies. So you have people who are still unemployed, you have people on zero hour contracts, you have people in part time work, so it’s important that you actually don’t just look at those people that are doing well, you actually create an enabling environment, an environment to basically serve the needs of everyone. It’s important to take, in my view, a top-down approach to what’s happening to the global economy.

What we’ve seen is how interlinked the global economy has become. The emerging economies – China, India, Brazil – maybe five, 10, 15, 20 years ago, they would have been seen as remote for many people here in the west. But now what we’ve seen, not just because of the crisis, but in terms of what you, or I, or indeed everyone buys, the brands and everything, we now very much live in the global economy. And it’s interesting to note that despite the financial crisis in the west, the world economy had continued to grow, so the important thing is for us in the west, in the UK and in London, is to continue to position ourselves to succeed in this changing and growing global economy.

World Finance: Looking to the improving EU and UK economy now, and have you seen other economic policies or stimulus that countries have implemented that could also be applied here to aid recover?

Gerard Lyons: Whichever economy one looks at, the outcome depends on the interaction between the fundamentals, policy and confidence, and when one looks at the UK the fundamentals did really take a big hit as a result of the crisis, but the economic fundamentals appear to be improving. The policy environment has been very much geared to initially addressing the crisis; that has, in the last 12 months or so, focused more on ensuring recovery gathers momentum. And monetary policy in some respects has acted as the shock absorber, interest rates remaining low, liquidity being added, and the fiscal situation is starting to be brought under control.

London: A hub for the highly-skilled

1.5m

High skilled jobs in London

1.2m

New York

800,000

Los Angeles

650,000

Hong Kong

As a result, if thinking about fundamentals, policy, and the last thing, confidence, because of that on the fundamentals and policy side, confidence now is finally starting to really improve here in the United Kingdom. It’s initially consumer confidence, as demands picks up it’s now feeding into business confidence as well, banks are also lending a lot more, particularly in terms of the south-east of England, but also in terms of clusters across the country as well.

World Finance: How do you see the future of the UK as a financial capital?

Gerard Lyons: There was a very interesting report that came out from Deloitte this year, talking about international cities, and looking at the type of high skilled jobs that you need, and what was staggering was how London really was well ahead of the competition. According to that survey, 1.5m high skilled jobs are here in London. The next closest city was New York at 1.2m, then it was Los Angeles I think just under 800,000, then Hong Kong about 650,000.

So what we have here in London is high skilled jobs not just in the banking sector. Even though we had a financial crisis, the reality is that when you look outside the banking sector here in London, at the business, professional, legal, consultancy services, they all did pretty well.

World Finance: Well finally, you recently suggested during an event at the Pattison Institute of International Economics that you foresee a huge upturn in economic prosperity. Where is this stimulus coming from?

Gerard Lyons: There is already an upturn in prosperity, but the prosperity has been seen in terms of the last few years very much across the emerging world. The western economies were hit hard by the financial crisis. But the important thing about globalisation and the fact that more people across the world are being brought into the global economy, is that the net result is that the world economy gets bigger.

But in moving from where we are now to where the world economy will be in the future, there are some winners and there some losers. So the important thing is for economies and different sectors in the west to adapt and change, so when you look at the world economy there are certain industries, certain creative industries, sporting industries, financial sectors, that might appear to be better positioned, so it’s very important to bear in mind that in terms of looking at the winners and losers, economies in the west not only play to their strengths, but try to actually make sure that their people have the right skill sets to be able to adapt.

The challenge is that many people don’t like change, so what we have to bear in mind is that we have to embrace change, but in embracing change we don’t only play to our strengths, but we actually create the skill sets that allow economies to be able cope not only with shocks, but seize the opportunities as well.

World Finance: Gerard, thank you.

Gerard Lyons: Pleasure.