Year: 2014

Japan leans in: Shinzo Abe’s push for womenomics

Posted on by Ashton Wenborn

Women in North America and Europe have been vital participants in since the 1960s. From then, women have gone from housewives, to clerical workers and finally to top executives. It would be foolish to say that the glass ceiling has been shattered, but a window up there has certainly been cracked open.

Figures vary from country to country, with Scandinavia topping the list for gender equality, according to the Global Gender Gap Report by the World Economic Forum, with other European countries following suit. Though wealthier nations tend to be more equal when it comes to gender, there is one notable exception: Japan (see Fig. 1).

Coining the term ‘Womenomics’
In 1999, analysts at Goldman Sachs led by Kathy Matsui concluded that Japan could increase its GDP by as much as 15 percent by bringing more women into the work force and closing the gender abyss that has formed in the Japanese labour market. Now, more than 14 years since Matsui’s legendary exposé of gender politics in Japan, things are finally beginning to change. The term ‘womenomics’, lifted from Matsui’s paper, is finally part of the Japanese political lexicon. And, ironically, it was a man who put it there.

Womenomics are a vital component of Prime Minister Shinzo Abe’s much lauded reform plans, affectionately known as Abenomics. Abe is committed to modernising the Japanese economy, long plagued with deflation and slow growth, and he insists that his goal of bringing Japan back to the foreground as an economic powerhouse will not be achieved without “tapping into its most underutilised resource: Japanese women.” Abe insists that his policies are all about empowering women. “Japan is a country with a shrinking population caused by a seemingly intractable decline in its birth-rate. But womenomics offers a solution with its core tenet that a country that hires and promotes more women grows economically, and no less important, demographically as well,” Abe wrote in his very well received op-ed column in the Wall Street Journal.

“My government’s growth plan forecasts that a two percent increase in productivity over the mid to long term will produce, in 10 years, an average of two percent in real GDP growth and three percent in nominal GDP growth,” he wrote. “To achieve this, we must capitalise on the power of women. We have set the goal of boosting women’s workforce participation from the current 68 percent to 73 percent by the year 2020. Japanese women earn, on average, 30.2 percent less than men (compared with 20.1 percent in the US and just 0.2 percent in the Philippines). We must bridge this equality gap.”

So far, Abe’s concrete plans for bringing more women into the workforce are still a little vague. When women joined the labour pool in Europe and North America in the 1960s and 70s, it was largely because of the contraceptive pill becoming available, allowing women to plan when and how to structure their families and careers. Birth control is already widely accessible in Japan, and yet women still don’t always choose to work. The prime minister has suggested that he will expand day-care provision to allow mothers to return to work after giving birth. In a speech to the UN General Assembly, Abe has vouched to implement an official development assistance programme in excess of $3bn over the next three years, with the aim of addressing women’s participation in society through health, medical care, and prevention and resolution of conflict related to women.

Birth control is already widely accessible in Japan, and yet women still don’t always choose to work

Japanese women seem to have responded positively to Abe’s plans, but they have been demanding better infrastructure and provisions for working mothers for a long time before Abe came along. In February, Ryo Tanaka, Mayor of Tokyo’s Suginami Ward, revealed that 2,968 families had applied for state authorised day care facilities, 400 more than the year before and 1,800 more than the state can cope with. In June, a group of women rallied in Tokyo demanding more public day care. Tanaka announced emergency measures to cope with the shortage of child-care spaces shortly after the protests. “I think the mothers were placed in a situation where they felt they had no choice but to raise their voices to be heard,” a Suginami official said. “We must earnestly listen to the urgent concern raised by these mothers, who need to go back to work and also raise children.”

A conflict of interest
Though the higher echelons of Abe’s government might be gearing up to meet these demands, Japan remains a deeply conservative society, and even innocuous calls for more free child-minding have been met with aggressive opposition. After the June 2013 protests, a number of political commentators took to the internet to express their displeasure at the thought of women leaving the home to work.

“What I am saying is don’t force your child rearing on society from the start,” read a particularly vitriolic blog entry by Liberal Democratic Party (Abe’s own) member, Yutaro Tanaka. He added that while he agreed that “women power” was necessary to boost the economy, the women who took to the streets to demand better support “had no touch of reserve nor shame.”

Japan remains a deeply conservative society…even innocuous calls for more free child-minding have been met with aggressive opposition

Though Yutaro Tanaka has been particularly vocal about his opinions, he is by no means alone. The trouble for Abe is that a number of high-ranking politicians and prominent businessmen still share these traditionalist and conservative beliefs. “Their view of women is basically as tools to boost the birth rate, reduce social security spending and increase growth. Women have a role because they are key to solving these three problems,” Mari Miura, a political science professor at Sophia University in Tokyo, told Reuters. “But they have a strong idea of the traditional family as a core ideology of conservatives. That ideology and reasonable solutions do not match, so the policy is always schizophrenic at best.”

But it is undeniable that when it comes to employment rations, Japan still lags behind in all key World Bank Gender Gap indexes. It ranks 104th in the world for female participation and opportunity, despite women and men scoring equally in literacy, primary and secondary education, and woman surpassing men by far in life expectancy.

Cracks start to appear at university level, where significantly less women choose to attend, and the gap gets persistently wider at boardroom level; so few women are on the boards of listed companies in the country that the World Bank could not compile a figure, and the same is true for firms with female participation in ownership.

Realising the only option
But Abe is well aware that in order to achieve greater female participation in the workforce, it is not sufficient to simply tackle the issue at the top. He will not be enforcing positive discrimination for women in boardrooms, for instance, but will instead follow the work the Jiro Aikawa, a Japanese development specialist working with young female African farmers. “Through his involvement in African agriculture, he has succeeded in doubling the incomes of 2,500 farmers in Kenya. Africa’s agriculture will not grow strong unless Africa’s women are first empowered, and unless Africa’s agriculture is made robust, Africa itself will not thrive. This is his conviction,” Abe wrote in his Wall Street Journal column.

“One of Aikawa’s strategies is to promote women farmers’ understanding of the consumer market. The goal is to move beyond agriculture that merely enables the farmer to eat, to agriculture that enables the farmer to earn money.” Though Abe’s bottom-up reforms might help women onto the first step in the career ladder, corporate culture in Japan remains entrenched in its regressive attitude towards women climbing the rungs after that.

[T]he policy is…schizophrenic at best

Though a number of large corporations have been publicly enforcing diversity policies as a way to boost profits, Keidanren – a big business lobby group – has blocked a proposal to make it compulsory for large companies to disclose gender statistics. While increasing female participation in the labour market will lead to growth in the long-term, Abe is still facing growing public debt and some measure of economic uncertainty. It will be a challenge for Abe’s government to find the funds to cover the reforms he has promised.

However, the economic possibilities of Abe’s womenomics might prove too irresistible for even the staunchest traditionalist to resist. In a recent interview with Reuters, Matsui reinforced that her findings of 14 years ago, and insisted that despite the opposition, Abe is doing the right thing. “It’s the first administration that I can think of that even mentioned women’s participation. So that’s a step forward. Obviously, this is going up against a tidal wave of potential opposition, but at the end of the day, what other choice do they have?”

A new era for the US Fed as Yellen takes the reins

Posted on by Ashton Wenborn

“She calls it like she sees it,” said President Obama in October as he backed Brooklyn-born Janet Yellen to succeed Ben Bernanke as Federal Reserve chair. “She doesn’t have a crystal ball, but what she does have is a keen understanding about how markets and the economy work, not just in theory but also in the real world,” he added, as a humbled Janet Yellen stood smiling by his side.

Yellen’s authority over 300 million Americans and the founding fruit on which they all depend will see her supplant the likes of Christine Lagarde, Angela Merkel, Dilma Rousseff and Hillary Clinton – at least for the time being – as the most powerful female figure in world finance.

Yellen’s authority…will see her supplant the likes of Christine Lagarde, Angela Merkel, Dilma Rousseff and Hillary Clinton…as the most powerful female figure in world finance

As the US returns to the verges of a fiscal cliff, one of Bernanke’s most celebrated protégés must stabilise the economy while somehow putting the breaks on quantitative easing.

Experience and early years
At 67 years of age, Yellen is six years older than the age at which the average American retires. However, with age comes experience, which in Yellen’s case is in no short supply. Having spent three years as the Fed’s vice chair, six heading the San Francisco Fed, two running the CEA and a further three on the Fed Board of Governors, her industry expertise is without compare.

Yellen’s childhood years were spent at Fort Hamilton High School, where she excelled academically and was named valedictorian of her graduating class in 1963. At the tender age of 18, Yellen migrated cross border to study economics at Brown University and in 1970 undertook a PhD at Yale University, which marked the beginnings of what would prove to be an impressive career in economics.

Soon after, Yellen became an assistant professor at Harvard University, served for two years on the Fed’s board of governors, and worked on the faculty of the LSE alongside her husband, George Akerlof. So often seen as second fiddle to the 2001 Nobel Prize-winning economist, Yellen found a perfect companion for bettering her own economic wisdom. “We liked each other immediately and decided to get married,” recalls Akerlof in his Nobel Prize biography. “Not only did our personalities mesh perfectly, but we have also always been in all but perfect agreement about macroeconomics.”

Sticky wages
Nonetheless, as time progressed so too did Yellen’s standing, best evidenced by the New Republic journalist Noam Scheiber calling Yellen for a story, only for her husband to pick up and promptly retort, “Well, I’m a pretty good economist too.”

Together Yellen and Akerlof developed their theory of ‘sticky wages’, which determined that, despite increased earnings, wages are often slow to follow; a principle that Yellen later introduced to the Fed’s fiscal dealings.

The original concept was inspired by an idea to pay their babysitter beyond the going rate, which then saw a string of excellent sitters apply, leading the couple to conclude that this same principle could be applied on a macroeconomic scale to great effect.

The duo’s hypothesis highlighted the market’s inability to reach equilibrium in the event of a downturn and went on to attribute this phenomenon to a number of factors, among them being self-preservation, union activity and regulatory barriers. However, as is the case with many of Yellen’s economic principles, a conclusive reason for the imbalance is yet to be determined.

The original concept [‘sticky wages’] was inspired by an idea to pay their babysitter beyond the going rate, which then saw a string of excellent sitters apply

It did take quite some time for the pair’s theory to be put into practice, however, as the two were forced to wait until 1994 before Yellen was appointed to the Fed’s board of governors. This new role not only saw her fulfil a lifelong ambition to join the institution, but also establish an impressive reputation in the field of economics, and in 1997 she was promoted to the chair of president Clinton’s Council of Economic Advisors. Her career in world finance then passed from strength to strength, as the Bay Ridge resident exercised her dovish tendencies and made a name for herself as an astute economic mind in the process.

Recent analysis by the Wall Street Journal shows that Yellen boasts the best economic prediction record of the 14 Fed employees it examined, ahead of William Dudley, Elizabeth Duke, Richard Fisher and Ben Bernanke, to name a few.

By far the most famous of Yellen’s predictions was in December 2007, when she rightly predicted that a recession could well be on the cards for the US. “The possibilities of a credit crunch developing and of the economy slipping into a recession seem all too real,” she warned, and it is this astute eye for detail and capacity for decision-making that best characterise her long and successful career in finance and economics.

Employment first
Obama’s support is unsurprising given that Yellen’s policies share a certain likeness with the administration’s valuation of employment ahead of inflation. At the Trans-Atlantic Agenda for Shared Prosperity conference in February 2013, Yellen spoke of the three million Americans who had been out of work for over a year and emphasised the importance of combatting this phenomena above all else. “These are not just statistics to me. We know that long-term unemployment is devastating to workers and their families. Longer spells of unemployment raise the risk of homelessness and have been a factor contributing to the foreclosure crisis. When you’re unemployed for six months or a year, it is hard to qualify for a lease, so even the option of relocating to find a job is often off the table. The toll is simply terrible on the mental and physical health of workers, on their marriages, and on their children.

Recent analysis by the Wall Street Journal shows that Yellen boasts the best economic prediction record of the 14 Fed employees it examined

“Long-term unemployment is also a great concern because it has the potential to itself become a headwind restraining the economy. Individuals out of work for an extended period can become less employable as they lose the specific skills acquired in their previous jobs and also lose the habits needed to hold down any job. Those out of work for a long time also tend to lose touch with former co-workers in their previous industry or occupation – contacts that can often help an unemployed worker find a job. Long-term unemployment can make any worker progressively less employable, even after the economy strengthens.”

Jeffrey Frankel, former member of Clinton’s Council of Economic Advisors and professor at Harvard University’s Kennedy School of Government, said, “I very much expect Janet Yellen to continue the policies of Ben Bernanke,” an opinion that echoes the expectations of the many.

For all intents and purposes, the Fed’s policies with regards to inflation look likely to remain essentially unchanged under Yellen, whose background has focused principally on unemployment and whose past remarks have sympathised with Bernanke’s approach. “The mandate of the Federal Reserve is to serve all the American people, and too many Americans still can’t find a job and worry how they’ll pay their bills and provide for their families,” she said in October 2013 at a White House ceremony.

For this reason, it would appear that under Yellen’s regime, an eventual ‘normalisation’ of policy for the Federal Open Market Committee (FOMC) is far from imminent and global markets will continue to depend upon artificial means of support. “Progress on reducing unemployment should take centre stage for the FOMC, even if maintaining that progress might result in inflation slightly and temporarily exceeding two percent,” she said at a meeting sponsored by the Society of American Business Writers and Editors in March.

What will be interesting is to see how Yellen’s focus on unemployment will tie in with recent plans to increase America’s minimum wage. Her belief that decent pay leads to better morale, and consequently higher productivity, suggests that a minimum wage rise may well come into effect when she takes the position. Furthermore, it could be said that the theoretical reasons for raising the minimum wage share a certain likeness with quantitative easing, with each assuming that with more money comes greater productivity.

The problem with bonds
The Fed’s aggressive expansionary policies have seen it pump $85bn of new money into the system every month, consisting of $45bn in treasuries and $40bn in mortgage-backed securities. Although Yellen’s candidacy campaign has seen little opposition, there exist a fair few who remain dissatisfied with the Fed’s seemingly ceaseless bond buying campaign and have proceeded to question Yellen’s stance on the subject in this same vein.

By far the most famous of Yellen’s predictions was in December 2007, when she rightly predicted that a recession could well be on the cards for the US

Critics worry that the Fed’s excessive bond buying will continue for far too long under Yellen’s liberal leadership and that her often overbearing tolerance for inflation could well lead to excesses that bear a certain likeness to the events that preceded the crash.

Among those most disconcerted by the Fed’s policies is Florida’s Senator Marco Rubio, who said in a recent press release that he would vote against Yellen, “because of her role as a lead architect in authoring monetary policies that threaten the short- and long-term prospects of strong economic growth and job creation.” Rubio went on to add, “Altogether, she has championed policies that have diminished people’s purchasing power by weakening the dollar, made long-term savings less attractive by diminishing returns on this important behaviour, and put the US economy at increased risk of higher inflation and another future boom-bust.

“Sound monetary policy established by the Fed is critical for long-term investment and economic growth. Unfortunately, the arbitrary way in which interest rates and our currency have been treated, especially over the last few years, has created asset bubbles and financial uncertainty that limit our economic potential.”

Cause for concern could well be justified given that America’s monetary base is rising rapidly as economic growth trails behind, leading many to fear an eventual bloat of inflationary implications at some point in the near future. Put another way, America’s wealth is but an illusion, and once Wall Street clocks on to this fact, losses could well spiral out of control.

Transparency and tradition
Although opinion is divided on Yellen’s dovish leanings, most are in agreement with her plans to improve upon the Fed’s transparency and better its longstanding and – some say – outdated traditions. The Fed’s history as a hierarchical and male-dominated space appears to be coming to an end, and Yellen’s appointment as the first female chair is the most obvious indication that America’s central banking system is undergoing considerable change.

Yellen’s appointment as the first female chair is the most obvious indication that America’s central banking system is undergoing considerable change

Another of the Fed’s structural changes can be seen in Yellen’s communications strategy, which is among her most impressive achievements to date, and requires a far greater degree of disclosure. “I hope and trust that the days of ‘never explain, never excuse’ are gone for good, and that the Federal Reserve continues to reap the benefits of clearly explaining its actions to the public” she told the Society of American Business Editors and Writers in Spring 2013.

Where once the Fed’s policy was to disclose very little about monetary policy moves, believing that this stance would protect against market overreactions, the existing approach is to trust more in financial markets and accept responsibility for its dealings, however catastrophic. “The Federal Reserve’s ability to influence economic conditions today depends critically on its ability to shape expectations of the future, specifically by helping the public understand how it intends to conduct policy over time, and what the likely implications of those actions will be for economic conditions.”

Although America’s aggressive bond-buying regime at first glance appears radical, Yellen is far from it; instead she is merely a product of a time wherein unemployment and the extreme means by which it is combatted are par for the course. While her appointment to the highest chair in central banking marks the pinnacle of a long and successful career, it also represents the beginnings of a new era for the Fed and for the global economy as a whole.

From billions to bust: where did it go wrong for Eike Batista?

Posted on by Ashton Wenborn

“I’m not bragging. It’s just a consequence of all the things that we have done. Just look at the assets. Jesus, by 2015 we will be making $10bn. Between 2015 and 2020 that will double, or triple. And those are discounted numbers I’m giving you.” Eike Batista’s modesty might not have shone through in his now infamous interview with the Sunday Times in March 2012, but his confidence certainly did. He was then Brazil’s richest man, the fourth richest person in the world and on a mission to the top. What a difference two years make.

In the intervening time, Batista lost most of his $30bn and tumbled right off any rich list he once appeared on. Batista’s white-knuckle ride of ostentation and loss culminated with OGX, his once celebrated oil-and-gas company and the cornerstone of his empire, filing for bankruptcy this past November, after missing $45m worth of payments to bondholders.

Though he still heads another four listed companies in energy, ship building, mining and logistics, Batista’s unconventional set-up and management style means that even the profitable parts of his sprawling businesses are likely to face the axe as a direct consequence of OGX’s failure.

Building something from nothing
Batista has been a ‘celebrity millionaire’ in Brazil for the past 30 years. Known for his extravagant taste, exuberant (and public) family life, and unrepentant ambition, Batista became the face of Brazil’s emergence as an economic powerhouse over the last two decades. In many ways Batista’s success was symbolic of what Brazil could be, with just a little bit of hard work.

His father was a prominent businessman who once headed Vale do Rio Doce and served as Minister for Mines and Energy in the 1960s and then the 1980s, but his children were raised by his estranged wife in Germany. As the youngest, Eike abandoned an engineering degree in Aanchen to try his luck in Brazil, and by the age of 25 he had made $6m by buying and selling gold. He married a model, bought a very big boat and started growing his business.

Batista made his real money in mining in the 1990s. Since 2004 he listed five successful companies under the EBX (Eike Batista X) umbrella: MPX in energy generation; MMX in mining; LLX in logistics; OSX in shipbuilding; and of course OGX. Batista once boasted to Brasil Econômico, that “the ‘X’ represents multiplication”, referring, of course, to his assets.

Batista’s troubles can be traced back to the launch of OGX in 2008, though they would only reveal themselves much later

The companies, excluding OGX, and a handful of other international holdings including a mining operation in Colombia, were virtually multiplying in size and value each month for much of the mid to late 2000s. In 2009 alone, EBX shares were up by 195 percent; LLX had gained 500 percent and Batista’s reputation as Brazil’s golden boy was solidified.

Batista’s troubles can be traced back to the launch of OGX in 2008, though they would only reveal themselves much later. The oil and gas company was launched and listed on the basis that it would explore prospects around Brazil, but without any actual fields in operation. It was always a risky proposition, but Batista had assembled a reputable team of experts behind his project, all ex-Petrobras with a wealth of experience in drilling in Brazil.

Batista was riding the slipstream of the discovery of Brazil’s enormous ultra-deep-sea crude oil reserves, known as the Pré-Sal region off the southeast coast of the country. OGX’s IPO raised $3.7bn and was Brazil’s biggest ever IPO at the time.

But in 2012, news broke that OGX was slashing production in what had been touted as its biggest oil asset off the Rio de Janeiro coast. It soon became apparent that for all of Batista’s skilled sales pitch, there was nothing supporting the hype of OGX. When the company announced it would be winding down production by 2015, it was producing 10,000 barrels of crude a day – barely a fifth of what it had promised in the IPO prospectus five years earlier. Shares tumbled by 99 percent and bonds were being traded at eight percent of their face value. However, that was just the beginning of Batista’s problems.

In the five years between OGX going public and then going bust, Batista seemed to be caught up in what can only be described now, with the benefit of hindsight, as unbridled megalomania. He had extended himself from energy production to flashy – and expensive – entertainment and hospitality ventures. At one point an EBX subsidiary was bidding for the Maracanã stadium concession, had won the contract to renovate and run a historic hotel in downtown Rio and was running the Rock in Rio festival, a ten-day party that brings the biggest names in pop music to Brazil.

The good times: Brazilian President Dilma Rousseff and Eike Batista celebrate the first oil extraction by his company OGX on an oil field in Porto Acu, 2012. Batista has been a 'celebrity millionaire' in Brazil for the past 30 years
The good times: Brazilian President Dilma Rousseff and Eike Batista celebrate the first oil extraction by his company OGX on an oil field in Porto Acu, 2012. Batista has been a ‘celebrity millionaire’ in Brazil for the past 30 years

These showy enterprises not only lost Batista a lot of money when it eventually became apparent they were being frightfully mismanaged, but they also lost him a lot of standing with the Brazilian public, who stopped thinking of him as an aspirational figure and started seeing him as something of an ostentatious show-off.

Overestimated assets
As OGX started to unravel, Batista’s almost risible capitalisation strategy became apparent; and the ultimate demise of EBX became a chronicle of a death foretold. Batista had relied heavily on government support, not only in terms when bidding for concessions, but also in investment through the Brazilian Development Bank (BNDES).

As of October 31, the bank stood to lose up to BRL 6bn, around $2.61bn of direct investment and financing of EBX projects. EBX’s main companies were all built upon the same foundations: the opportunity to profit from Brazil’s exuberant mineral reserves by investing in the infrastructure that the government would be unable to build itself.

Batista was building ports, ships, energy infrastructure and mines; all of his companies were interconnected, MMX’s mining products would be shipped from LLX’s multi-use port, which would also be used as an oil hub for OGX’s products, and so on. When OGX and its billions of dollars worth of debt came crashing down, it dragged down the whole lot of them.

He built a $30bn house of cards by persuading investors, banks and the Brazilian government that his superstructure of companies could be the answer to all of Brazil’s infrastructure needs

Batista started his business life peddling insurance door-to-door, and his salesmanship is undeniable. He built a $30bn house of cards by persuading investors, banks and the Brazilian government that his superstructure of companies could be the answer to all of Brazil’s infrastructure needs.

He sold a dream. However, by 2012 it was obvious that the man lacked the management skill to make that dream function past the sales pitch. Batista had not only built his conglomerate in such a way that his main companies relied heavily on each other to succeed, but he also severely leveraged OGX, by far his most ambitious enterprise, on his other, already successful companies. When OGX announced it was suspending operations, Batista was leveraged up to his ears.

In June, Batista, seeing EBX on the verge of collapse, took out a full page editorial in the O Globo and the Valor newspapers. Though described by the local media as a mea culpa of sorts, in which he confronted headfirst the perception that he benefited “from a rampant wave of capital building, that [he surfed] on a wave of an inflated market, that without any apparent reason, offered him a blank cheque with a few billion with which to play at being an entrepreneur.”

However, though he admitted this is how he has come to be seen by the market and the public, the editorial did nothing to disabuse any one of those opinions. Batista boldly placed the blame for OGX’s shortcomings on the ranks of executives he had drafted in from other oil and gas companies to help him develop the company, who he all but accuses of having over-inflated expectations with their optimistic analysis of the market and the company itself. “I was as surprised as any of my investors, collaborators and the market,” he wrote, referring to the losses accrued by OGX.

“More than anything I ask myself where I have erred,” he continued. “What should I have done differently? The first issue is probably linked to the financing model I chose for my companies.” Batista suggests that by relying on the stock market he condemned his companies to failure. He admits to being too eager: “If I could turn back time, I would not have resorted to the stock market. I would have structured private equity that would have allowed me to build the companies from zero and develop them each over 10 years.”

Though Batista is not wrong when he identifies his financing model as a major factor contributing to the undoing of his empire, his inability to take responsibility over the mismanagement of his many investments is worrying. Though he has managed to sell off the least damaged of the ‘X’ companies – LLX was bought by EIG Global Energy Partners, MMX was sold to Trafigura, a Dutch commodity trader and Mubadala, Abu-Dhabi’s sovereign wealth fund, and MPX was bought by E.ON and renamed Eneva. The Colombian coalmines are also being sold. But there are billions of dollars in debts to service, and the rest of his smaller enterprises continue to struggle.

Throughout the collapse of OGX and the subsequent quartering of EBX, it became increasingly apparent that for all of Batista’s confidence, his enthusiastic showmanship, his jolly arrogance and ostentatious lifestyle, deep down he remained the door-to-door peddler of his youth. He was a good salesman, but his shortcomings as manager and executive made his downfall.

He was a good salesman, but his shortcomings as manager and executive made his downfall

Batista is now facing a lengthy legal struggle against his creditors as he tries to limit losses. EBX is on full damage control mode now; they have filed a number of suits with the Brazilian justice system in an attempt to stay off bankruptcy and avoid trouble with the creditors, all of which remain unresolved.

Batista’s personal fortune, once estimated at $34bn, has dwindled to around $200m; three of his private jets and a helicopter have been sold. It is unclear how Batista will manage to extricate himself from the tangle of debts and collapsing contracts he has woven around himself, but it will take years before he can truly move on from this disaster. Perhaps he should have taken note of the old maxim: Jack of all trades, master of none.

The race for video game innovation

Posted on by Ashton Wenborn

Derided for years by older generations as an industry purely aimed at children, the video games industry has grown to such a level that it is now among the most dominant – and most profitable – of all the entertainment industries.

Worth around $80bn, the global video game industry has exploded in popularity over the last two decades, in part due to technological innovations but also because of the ageing population of youthful gamers that are reluctant to put down their control pads once they hit their 30s. Indeed, in the US, the average age of gamers is 34, while roughly two fifths of these gamers are female, defying the stereotype that this is an industry purely for adolescent men.

But despite this perception of the industry as a niche, frivolous market catering predominately to single young men, it is neverthless one that is shaping the future for many other markets.

Wii

100.3 million

Units sold

34.3 million

Copies sold of their best selling game (excl. packed-in games): Mario Kart Wii

Playstation 3

80 million

Units sold

15 million

Copies sold of their best selling game: Grand Theft Auto V

Xbox 360

80 million

Units sold

14 million

Copies sold of their best selling game: Grand Theft Auto V

It is not just about the major console designers and the games developers, however. Mobile devices and online platforms are rapidly expanding the gaming industry’s reach. There is also a vast ecosystem of branch industries that serve the console-makers, which includes a wide array of smaller, specialist firms that are innovating in all manner of areas.

Last year, US industry group the Entertainment Software Association (ESA) published its report into how the gaming industry has grown to the level it is today. Michael D Gallagher, President and CEO of the ESA, spoke about how the sector has experienced a level of growth unmatched by any other. “No other sector has experienced the same explosive growth as the computer and video game industry. Our creative publishers and talented workforce continue to accelerate advancement and pioneer new products that push boundaries and unlock entertainment experiences. These innovations in turn drive enhanced player connectivity, fuel demand for products, and encourage the progression of an expanding and diversified consumer base.”

Key players
The industry’s key players for the last decade have been Japan’s Sony and Nintendo and US tech giant Microsoft. Sony’s PlayStation revolutionised games consoles in the middle of the 1990s, bringing games to a more mature customer base. By the turn of the century, Microsoft decided to get in on the action by releasing its wildly popular Xbox console. Nintendo, previously the dominant player in the industry, retreated to offering consoles to a more family-orientated audience as opposed to hardcore gamers, as well as innovating motion-sensor products like its Wii console.

Last November proved to be the new dawn for the industry, with Microsoft releasing its hugely anticipated – and somewhat controversial – Xbox One console to replace its industry-leading Xbox 360. Sony followed suit, releasing its Playstation 4 console, which it hoped would reverse the company’s decline over the last decade. Nintendo aimed to steal a march on both rivals by releasing its Wii U product a year earlier.

Both the Playstation 4 and Xbox One come with radical new technologies designed to take gaming – and home media – to the next level. However, each company took a very different approach to the launch of their new console. Microsoft received derision from the gaming community when it announced it wouldn’t allow gamers to lend their games to friends and required an internet logon each time they were played – decisions that were quickly reversed. It also raised concern from people with its insistence that the Xbox One would use its Kinect motion tracking camera to monitor the room at all times, enabling it to sense when a user enters the room, and recognise the voice and physical appearance of that user.

Anand Shimpi, founder of AnandTech news and an expert on internal computer components, told the BBC in November he thought there were clear similarities between the two new consoles. “For the first time the guts of both the Xbox and PlayStation are very similar – their processor and memory hardware vary in performance but not capabilities. Gone are the days when Sony’s machine was substantially more difficult to program for than Microsoft’s. In fact, the PlayStation 4 has appreciably more graphics horsepower under its hood than the Xbox One, there’s no way around that fact.

“Both firms have licensed the same GPU (graphics processing unit) architecture, but Sony’s chip has 1152 ‘cores’ compared to Microsoft’s 768. Microsoft runs its cores at a slightly higher speed, but the maths works out to Sony having about a 40 percent peak potential graphics performance advantage.”

Shimpi added, “The real question is whether this translates into a substantially better gaming experience. Typically developers building one game for multiple platforms target the lower performing one, and may offer some additional perks to the faster one – smoother frame rates, slightly improved visuals.”

Controlling the living room
The new wave of consoles to enter the market in recent months have included features designed to amaze and astound players accustomed to relatively straightforward gaming. While online platforms are nothing new, both Microsoft and Sony have created online hubs where players can download exclusive content, play against complete strangers on the other side of the world, and access a range of additional services. No longer just about gaming, the industry has sought to diversify into new areas, with both the Playstation Network and the Xbox Live platforms allowing apps to be downloaded that include television and film streaming service Netflix, as well as email services and video messaging.

The Playstation Network has been praised recently for its openness to independent developers and flexibility, but Shimpi believes that Microsoft’s existing user base gives it an advantage here. The company still has a widely used ecosystem of services that will help it retain users. Shimpi says, “Here’s where Microsoft believes its other strengths – Xbox Live, developer relations, the Kinect sensor – will give it the advantage. Microsoft is basically counting on everything else being so good that developers would rather give it their exclusives.”

The tech market many think is likely to be revolutionised next is in the living room. With Apple rumoured to be launching a smart television set capable of doing many of the things personal computers are used for, consoles like the Playstation 4 and Xbox One are attempting to become the entertainment hub of people’s living rooms.

Apple has itself bought a company responsible for the Xbox’s Kinect motion-detecting capabilities. In November it confirmed the $360m acquisition of Israel-based firm PrimeSense, which developed key parts of the Kinect service. It is unclear what Apple plans to do with this, but it’s thought that the technology is likely to be implemented into a future smart television set. It certainly shows that there are innovative independent firms in the gaming industry waiting to be snapped up by some of the world’s leading tech companies.

Value chain
A typical value chain doesn’t necessarily apply to the video game industry, in which constant innovation means developers have to keep an eye on the latest trends. A concurrent engineering approach to developing products is employed, allowing new games to be created quickly. The development of a video game console begins with the investment layer, where funding is sought for the development and production of games. Most developers look to outside investment in order to fund their games, with leading companies like Activision and EA (see table) investing large amounts in potential new game franchises each year.

>60 million

UK population

>31 million

UK active gamers (approx.)

Once funding is received, the creative teams get to work designing the visuals and sounds for games, creating a unique style and story for the game. Leading developers like Ubisoft, maker of the popular Assassin’s Creed series, are renowned for creating distinct worlds in their games. Another, Rockstar Games, has been feted for its incredibly detailed approach to creating whole, living cities in its Grand Theft Auto series of games. The creativity of the games industry has led to many of the best writers that are traditionally found in Hollywood deciding to pen complex stories for video games, while actors are hired to give their likenesses and voices to characters.

Production is then carried out, where the necessary tools and game engines are created. Upon completion of the technical aspects of the games, distributors and publishers are brought into the equation. Some of the leading games companies, such as EA, Take-Two and Activision distribute their own games, but other firms act as the mechanism for spreading the game around the world. Japanese firm SEGA, which used to make consoles, is known for distributing many popular titles, including the Football Manager games.

The penultimate stage in the value chain is the hardware layer, which is the consoles or mobile devices that provide a platform for the games. While traditionally dominated by consoles like the Xbox and Playstation, mobile platforms are becoming increasingly prevalent, promoted mainly by both Google and Apple.

Finally, the game and platform reaches the end user, the consumer of the title and person that all companies hope will go onto promote the game among friends, buy additional content and any subsequent versions of the game. Word of mouth plays a crucial role in the industry, perhaps more so than any other. Users tend to lend their games to each other, spreading the word among the community. While Microsoft’s decision to restrict games to one user may have been justified in terms of preventing piracy and boosting sales, it also would have potentially damaged the ability for the reputation of games to spread.

Loss leaders
Many observers have speculated whether the new consoles from Microsoft and Playstation will be loss leaders, as has been the case in the past. Usually, manufacturers have taken a hit when selling new consoles because they’ve subsidised the cost. Sony is reported to have lost around $260 on each Playstation 3 console it sold, contributing to a loss of $1.2bn during 2008. This time, Sony has priced its new console in the US at a surprisingly low $399. According to reports, the components of the Playstation 4 cost a combined $332, not including packaging or a controller. Sony is attempting to capture market share, tying users into its ecosystem of services, which it hopes will make up for the losses made on the consoles.

Microsoft, on the other hand, has gone for the higher price of $499, hoping that its already considerable user base will enthusiastically buy the new machine. Marketing manager Yusuf Mehdi told GamesIndustry.biz in September that it was the company’s intention to at least break even. “The strategy will continue, which is that we’re looking to be break even, or low margin at worst, on the Xbox One, and then make money selling additional games, the Xbox Live service and other capabilities on top. And as we can cost-reduce our box, as we’ve done with the 360, we’ll do that to continue to reduce and get even more competitive with our offering.

Wooing developers
Getting developers onside to create the best games is crucial for both Microsoft and Sony. While Microsoft has been widely praised in the past for providing an open platform, Sony lost ground by complicating matters for smaller, more independent developers. Daniel Kaplan, business developer at Stockholm-based game-maker Mojang, says it remains to be seen how easy it is to develop for each platform. His company is the maker of the hugely popular Minecraft game, which has sold more than 45 million copies. He told the BBC, “Both Microsoft and Sony talk about the new platforms as indie-friendly and it will be interesting [to see] if that is the case.

“So far, for us it has been quite good but what I’m hearing from other developer friends, who are not in the same fortunate position of having had a bestselling game like Minecraft, is that there still seems to be a lot of forms to fill in to gain access to software development kits and tools.

Time taken to make $1bn

19 days

The Avengers (film)

3 days

Grand Theft Auto V (game)

Highest-grossing game of all time (incl. subscriptions):

$10bn+

World of Warcraft

The difficulty independent developers are finding is the need for two distinct development kits when designing for each platform, says Kaplan. “The idea that you need a separate development kit – a special version of the console that can be very expensive – to create games for the PS4 and Xbox One is quite bad for indies since a lot of them usually have very little cash at hand, so removing as much friction as possible would be ideal.”

He points to Google and Apple’s approach of having a standardised developer kit. “There is really no need of all of this behaviour since both Google Play and Apple’s App Store have shown that you can create open markets for all kinds of developers with the same deal for everyone.

“Giving more or less everyone the same opportunity is important for the indies. It allows their developers to focus their time on creating games and not on filling out forms describing different features or ordering developer kits for a lot of money that may not ultimately bear fruit for them anyway.”

He concludes, however, by saying that both companies are changing the way they operate and it will be interesting to see how open they become. “With that being said, both Microsoft and Sony are changing and I’m really looking forward to what will happen in the future.”

Wooing the developers for exclusive content is key for each company, and Sony’s new openness to independent developers and easy-to-use platform could give it an advantage, says Shimpi. “I suspect that’s what will happen this generation. At worst you’ll see parity between the two consoles, but at best you’ll see developers give PS4 versions of cross-platform games a slight edge. Where things get really interesting is what happens if a developer chooses to develop exclusively for the PS4 and go all out.”

There is unlikely to be a clear winner in the market, however, as both have developed consoles with distinct products. “Sony appears to have built the faster gaming machine, while Microsoft has built a system that might appeal to a broader audience and perhaps consume less power. There are strengths in both platforms – anyone hoping for a clean sweep will likely be disappointed.”

Cuba to ditch complicated dual-currency system

Posted on by Ashton Wenborn

Cuba has been undergoing a number of quiet but drastic reforms since Raul Castro assumed the presidency of the island nation from his brother, Fidel, in 2008. The latest, and perhaps most significant step towards modernising the country’s economy has been the announcement last month that Cuba would be doing away with it’s complicated dual currency system.

The arrangement has been very unpopular, and Castro has long since promised a solution, and now it seems like one might have arrived. Since 1994, the country has functioned with two currencies, one pegged to the dollar and one worth a fraction of it. The Cuban Peso (CUP) and the Convertible Cuban Peso (CUC) are both legal tender on the island, though neither are convertible in the foreign exchange markets. CUC is pegged to the dollar and most goods are valued in that currency, but the majority of people in Cuba are paid in CUP.

Restricted access
The complicated system has been used in Cuba since the collapse of the Soviet Union. Cuba had enjoyed an extremely beneficial trade agreement with the Eastern bloc, which had enabled it to bypass US embargos. So when the Soviet Union was dismantled, Cuba was left with limited access to hard currency, economically isolated and facing hardship.

Fidel was forced to legalise the dollar, reversing a decades old law that had made possession of the American currency punishable by prison. It was a momentous decision for Fidel Castro, both ideologically and practically.

[M]ost experts agree that a dual-currency system can never be anything but trouble

The legalisation of the dollar created a two tier economy that split those with access to the dollar from those that could only access the peso. State workers in particular, who were paid very little and in pesos, felt the brunt of this policy. With the dual-currency system, Fidel harboured a change in Cuba that had been exactly what he had fought against for so long; a country split by class, where a privileged minority could access luxury goods and benefit from the burgeoning tourism trade, and an underclass of state-workers who could only access the weak peso.

The CUC was brought in in 2004 to replace the dollar, but for many Cubans that was just a new name for an old problem. At the moment, the government controls almost all prices in Cuba, and companies must exchange their dollars and CUCs at official government exchanges, and neither CUCs nor CUP’s are exchangeable
outside the island.

The unification of the peso was announced by the official Communist Party newspaper Granma, which declared the move is “imperative to guarantee the re-establishment of the Cuban peso’s value and its role as money, that is as a unit of accounting, means of payment and savings.”

A historic divide
In 1994, Fidel Castro was backed into a corner and forced to accept the dollar as a viable currency or risk bankrupting his country, but most experts agree that a dual-currency system can never be anything but trouble. The issue is the exchange rate between the two currencies, which can either be left to be determined by the market, or be set by the local authority.

If the rate is market-determined, a second currency is only a way to inject liquidity into an economy. However, if the rate is set artificially and managed by an authority, the dual-currency system ceases to be dual as the overvalued currency will eventually replace the undervalued one. This is known as Gresham’s law, after Sir Thomas Gresham, a 16th century British financier who famously described the phenomenon: “Good money drives out bad money.”

The legalisation of the dollar created a two tier economy that split those with access to the dollar from those that could only access the peso

It is an ancient principle that had been predicted by Nicolaus Copernicus, and even by Greek philosopher Aristophanes at the end of the fifth century BC, before being coined by Gresham. The trouble in Cuba is that the government never allowed the more valuable currency, the dollar, the replace the undervalued currency, the peso, and in that it split the country’s economy in two.

The longer the system was allowed to exist, the more difficult the situation became to resolve, which is why currency unification has been a major goal of Raul Castro’s administration for the past few years.

At the time of the announcement the CUCs value was pegged to that of the dollar, and the CUP was worth around four cents. According to official Cuban statistics, most Cubans make around $20 a month in CUP’s. As the CUP’s are not accepted in most shops – particularly those selling sought-after imported goods – the dual currency system has long since been a major gripe for Cubans, who resent the restrictions.

“The currency unification isn’t a measure that will resolve on its own the current problems of the economy. But its adoption is vital to restoring value to the Cuban peso,” the announcement in Granma read. The announcement did include a date by which currency unification would be completed, but it has been speculated that the whole process might take over three years; the Cuban Central Bank will continue to back both currencies in the time being.

When the currencies are unified, Cuba will likely have to face up to a number of uncomfortable truths about the overall state of its economy. Many issues, such as an endemic lack of transparency and efficiency, have little or nothing to do with the dual currency system. But it will undoubtedly have the effect of improving Cuba’s credibility internationally.

The complete unification of the currencies is many months, maybe years, away from being fully achieved, but it could well be the policy that defines Raul Castro’s legacy as the reformer of Cuba

The news of the currency unification has already led to Russia and Cuba reaching an agreement to write off close to 90 percent of Cuba’s £32bn debt (acquired from the Soviet Union), putting an end to almost two decades of disagreements between the two countries. Though the agreement is still pending approval from the Duma – Russia’s Houses of Parliament – it would be a major step towards rehabilitation of the
Cuban economy.

The deal with Russia is the latest in a string of deals with other countries like China, Japan and Mexico which have helped Raul Castro re-structure Cuba’s active and commercial debt.

“The agreements with China, Japan, Mexico and Russia ease some outside financial restrictions on the Cuban economy and should facilitate trade ties with these countries,” Pavel Vidal, a former Cuban Central Bank economist now teaching at Colombia’s Javeriana University, told Reuters.

“The austerity measures adopted by the Government in 2009, and these accords to lower the foreign debt, help stabilise the island’s finances at a very important moment when a significant monetary reform over three years has begun.” Cuba’s situation is by no means unique, though.

China unified its official and swap market exchange rates in 1994, but the two currencies in Cuba are wound up much more tightly, and will thus be more difficult to fix. A major hurdle will be addressing the value of goods, which have long since been set by the government in dollars.

Though the Cuban Government has not offered details of the transition, it is likely that it will begin with some stores accepting CUPs as well as CUCs. Some state enterprises may start trading the two currencies using pre-set exchange rates. At the moment the rate stands as 25 CUPs to one CUC.

Defining Castro
In its announcement the Government has promised to make good on the peso, stating any of the inevitable devaluations before hand and giving people the opportunity to convert their holdings. It is likely that the new, unified peso will be valued at more than the CUP but less than the CUC, and for many Cubans that will represent an increase in spending power, which in turn could lead to inflation and shortages of some goods.

It is also likely that Cubans with access to that currency will meet the fall in the value of the CUC during the unification process with some resistance. Even before the announcement, rumours that a currency unification was on the horizon caused a palpable decline in the value of the CUC.

The Economist reported that big hotels in Havana have been offering to buy dollars, off the book and for above market rates, and that an underground network of currency traders is creeping up around the city. On the other hand, once the currencies are unified, Cuban state companies will be able to stop the practice of pretending that both types of pesos are the same value on their books and balance sheets. Though this practice has helped manage CUP inflation, it has also helped hide the many inefficiencies of state owned companies.

The complete unification of the currencies is many months, maybe years, away from being fully achieved, but it could well be the policy that defines Raul Castro’s legacy as the reformer of Cuba. If it was once feared that Raul would struggle to fill his brother’s shoes as president, it seems that by promoting prudent and timely economic reforms – which Fidel was so reluctant to do – the younger brother will have carved an even bigger name for himself in modern Cuban history.

Could Songdo be the world’s smartest city?

Posted on by Ashton Wenborn

Seoul, in South Korea, is one of the ‘smartest’ cities in the world; it boasts the most cutting-edge infrastructure as part of daily life. The metro is not only the most extensive subway system by length, but also boasts ultra-fast Wi-Fi. The transport network itself is meticulously timed, with arrival and departure times displayed clearly on laser panels outside stations and bus stops. But a new development 40 miles outside of the South Korean capital is so advanced that Seoul will look positively medieval by comparison. The Songdo International Business District, constructed on a new embankment on the Incheon waterfront, is a purpose-built ‘smart city’, designed for efficiency and convenience.

Songdo by numbers

$40bn

Cost of the Songdo development (to-date)

40%

Area dedicated to outdoor spaces

40miles

Outside Seoul

Building a city from scratch to fulfil a specific need is not a new concept; Canberra, Brasilia and Abuja were all built in the last 60 years as functional capital cities. But Songdo is unique, being built as an integrated hi-tech environment. Developers describe Songdo as a ‘global business hub’ and ‘home to a variety of residential and retail developments’, but at a cost of over $40bn, is Songdo just a glorified model neighbourhood?

The smart city occupies 1,500 acres of land ‘reclaimed from the Yellow Sea’, making it the largest private real estate development in history. But it’s not the geographical space that makes Songdo remarkable. The district was built as part of former President Lee Myung-bak’s drive to promote low-carbon and sustainable growth as the principal avenue for development in South Korea.

For over half a century, the country’s economy has been dependant on exports and South Korea has become known for its hi-tech industry. When the global economic crisis struck in 2007 and 2008, and foreign demand for South Korean products slumped, the government launched a stimulus package aimed at developing the country’s own infrastructure, with a particular emphasis on green investments.

Lee launched the Framework Act for Low Carbon Green Growth, a $38bn economic stimulus package, 80 percent of which was earmarked for green and sustainable investments. In 2010 the National Assembly of Korea increased the value of the Framework Act to over $83.6bn, to be invested over five years.

Songdo has been a huge part of the move towards sustainable growth. The city is a novel model – 40 percent of its area is dedicated to outdoor spaces. By comparison, Seoul and other South Korean metropolises are densely populated with few open-air areas for residents. Songdo is unique, offering city inhabitants something they have never had access to before: green space for leisure. The district has been heavily promoting its 16 miles of bicycle lanes, its central park, and its waterways, which are based on New York City’s Central Park and Venice’s canals, respectively.

Business and leisure
While South Koreans might not have been wooed by the district’s state-of-the-art urban infrastructure, it has certainly been a selling point for international investors. Songdo is the first district in Korea to receive Leadership in Energy and Environmental Design (LEED) accreditation, and the largest project outside the US to be included in the LEED Neighbourhood Development Pilot Plan.

This means the entire development adheres to the strictest environmental standards for energy consumption and waste. According to developers, over $10bn was invested in the design and build of the 100 main buildings in the district, including the Northeast Asia Trade Tower, which will be Korea’s “tallest building and most advanced corporate centre,” according to Songdo’s promotional material.

In many ways Songdo is a living organism. The city’s infrastructure contains sensors that monitor and regulate everything from temperature to energy consumption and traffic

Because the district was built from scratch, it has given developers the opportunity to invest heavily in technologies that have yet to debut in conventional cities. Take Songdo’s smart rubbish disposal system, a futuristic bit of hardware that spans the whole complex. No rubbish trucks will ever roam the leafy streets of Songdo, instead all household and office waste is sucked through a network of underground tubes to vast sorting facilities where it is all processed, deodorised and treated. The aim is to eventually convert all this sorted and treated waste into energy for the community, but the system is not yet fully operational.

In many ways Songdo is a living organism. The city’s infrastructure contains sensors that monitor and regulate everything from temperature to energy consumption and traffic. Essentially, the city can interact with residents on a one-to-one basis. Smart grids and meters are already fairly common in Europe and the US, but the technology in Songdo is more pervasive than anything in the West. Because it was designed to this specification and not converted later like most ‘smart cities’ in the rest of the world, Songdo is completely geared towards sustainability; even the water pipes are designed to stop clean water, suitable for human consumption, being used in showers and toilets, and all of the embankment’s water goes through a sophisticated recycling system.

Everything in Songdo might have been meticulously designed, but there is one key element that has not gone according to plan. Since it’s official launch in 2009, the sustainable district remains woefully under-occupied. Despite it’s enviable location close to Seoul and it’s international airport – “just 15 minutes driving time from Incheon International Airport and three and a half hours flying time to a third of the world’s population and regional markets such as China, Russia and Japan,” reads the brochure – less than 20 percent of the commercial space in the district has been occupied.

Ghost town
Pre-planned cities have been around for centuries, and they always face the same challenges: how to attract residents and businesses to a new, untested, and unpopulated area. China has faced this problem as the building boom of the early 2000s encouraged developers to invest in new cities and shopping districts that ultimately failed to attract buyers. Songdo is very well connected, and the business facilities are second to none, but attracting inhabitants may still be a slower process than developers hoped for.

In order to speed up the population process, developers have been investing heavily in top-quality international education centres. The hope is to entice a diverse international community. Before the end of 2014, four universities will inaugurate campuses in the business district, including the first overseas university to open a campus branch in Korea, the State University of New York, Stony Brook, as well as George Mason University and the University of Utah, all sponsored at least in part by the Ministry of Knowledge Economy. There is also an enormous, exclusive international school catering to children from kindergarten to high school.

Songdo is the city of the future; all that is missing are the residents

And while Songdo is not yet a hit with the international business community, young professionals have flocked to its leafy boulevards looking for a better lifestyle than the hectic streets of Seoul can offer. The district offers over 22,500 new housing units built to different specifications – from garden houses to sleek high-rises – all connected to the district’s energy, water and waste facilities.

But businesses may soon follow, attracted by the skilled workforce provided by the universities, the sustainability credentials and the tax breaks. “It’s the occupants who make a city,” Jonathan Thorpe, CIO of Gale International, the American developer behind Songdo, told the BBC. “You’re trying to create a diversity and a vitality that organic development creates, in and of itself,” he explained, “so it’s a challenge to try and replicate that in a masterplan setting. At the same time, with a masterplan you have the ability to size the infrastructure to make sure the city works – now and in 50 years’ time.”

And the brains behind Songdo have thought carefully about financial incentives for businesses. Companies relocating to the district will have access to tax reductions, estate support and subsidies. No property tax will be levied for 10 years, followed by three years where businesses need only pay 50 percent of taxes due; small- and medium-sized companies will also be considered for rent reduction; and employees of companies with over 30 percent international investment will be able to claim a variety of perks – from location subsidies to promotion results compensation.

For South Korea, Songdo is more than a hi-tech business district, but a template for future developments. It is the prototype for the green investment the government wants to build the economy on in the future. It is all designed to appeal to foreign investors, but its manicured gardens and glassy towers also give it an unmistakable air of luxury. This is the aspirational South Korea where everyone is wealthy and your mobile phone controls the temperature in your apartment. Songdo is the city of the future; all that is missing are the residents.

Mexico’s tax reforms: opportunities and obstacles

Posted on by Ashton Wenborn

Congregated along Mexico’s border with America are hundreds of factories known as maquiladoras, or assembly plants. Mostly foreign and in particular American-owned, they export their products under long-standing, favourable tax arrangements that have contributed greatly to Mexico’s economy.

According to Mexican research institute Colegio de la Frontera Norte, the maquiladoras account for 60 percent of all jobs provided along the frontier states. And in Mexico as a whole, the factories’ contribution to the economy is second only to that of oil giant Pemex, easily the biggest business in the country. The more than 5,000 maquiladoras in Mexico provide 1.9 million jobs, estimates the Congressional Research Office.

As Richard Rubin, a local businessman associated with the factories, told the Christian Science Monitor, “Mexico would be crazy to destroy the maquila [assembly] industry.”

Stormy passage
But that may be an unwanted consequence of a tax package that was voted through congress in late 2013 after a stormy passage that saw the opposition walk out in protest because, it warned, the measures would damage the economy. The wide-ranging changes affect most sectors, from finance and the stock market to retailers and manufacturing. The financial sector, for example, will be hit by new rules on write-offs for bad debt.

Withholding taxes

Most countries apply withholding tax to dividends paid on securities, such as shares held by non-residents. In most years they collect around $3.7bn – but most of these nations also give it back under bilateral arrangements known as income tax treaties negotiated between governments.

The right to make a claim – or rather, a reclaim – arises because the rate applied under these treaties is generally lower than the default withholding rate, normally around 15 percent, fixed by most foreign governments. Some countries charge more, such as Brazil and India, who withhold 25 percent. The five-star location for foreign investors is the UK, which allows 100 percent reclaims on investments made in British companies.

But things are not always how they seem. Differing national regulations can result in higher or lower reclaims than expected. For instance, under Canada’s tax treaty with Israel, the rate is 15 percent, while withholding tax on divvies issued by Israeli companies is 20 percent. So Canadian investors in Israeli companies should get back five percent? Wrong. They generally recover 11 percent because the actual rate works out at nine percent. This is one reason why foreign investors in Mexico should work through international accountants.

From January, banks are permitted to deduct these for tax purposes only after they are legally defined as uncollectable. And that can happen only when the government, in the form of the National Banking and Securities Commission, issues a specific authorisation.

In an attempt to increase the taxable income available to it, the government has also dragged insurance companies into the net. Until now, these firms have been allowed to create and deduct so-called technical reserves accumulated for risk, actuarial and other purposes, as Ernst & Young points out. But henceforth deductions will be accepted only for actual and verifiable losses.

Of huge importance to so-called ‘bird-in-the-hand’ investors are new measures on withholding taxes. These comprise a 10 percent tax on dividend payments and distribution of profits by Mexican companies. Some consultants have pointed out that, because the distributing company will henceforth be defined as the taxpayer, this could effectively sideline cross-border tax treaties that normally allow shareholders to claim deductions.

And accountancy firms are still trying to figure out the implications of the regulations on payments to related parties – but it will certainly hit them in the wallet. “This is a very broad rule that would appear to require that the taxable base of a non-resident recipient of income from Mexico [must] be calculated based on Mexican rules,” suggests Ernst & Young. Loopholes will be hard to find.

And finally, there will be a tax on stock market gains. The current exemption on the sale of publicly traded shares will be axed and replaced with a 10 percent impost. Whatever the full implications turn out to be, the combined rules are certain to make ‘bird in the hand’ investors – those who prefer to take their gains in regular dividends rather than wait for capital gains – think twice about putting their money into big listed companies.

Changing rates
Meantime, the maquiladoras are weighing their options. All of them will lose some of the preferential tax breaks that first brought them here in the 60s. First, they will have to pay a new 16 percent sales tax on all goods imported for assembly prior to export.

Although the tax, which is designed to thwart tax cheats, is reimbursable, it will certainly have an effect on cash flow. Second, retail sales tax – long fixed at 11 percent to attract business from Arizona, Texas, New Mexico and other US border states – will increase to 16 percent in line with the rest of the country. And for good measure they will also be hit by a Mexico-wide hike in corporate tax from 17.5 percent to 30 percent.

Fortunately dropped from the package were plans for a second import tax on the factories. However, some factory owners are still threatening to shut down their businesses and go elsewhere.

The country’s tax system is chronically top-heavy

It is not hard to understand President Enrique Pena Nieto’s dilemma. His most pressing economic problem is Mexico’s low tax take, in fact the lowest by some margin of all 34 OECD member countries. The total tax revenues at his disposal amount to just 19 percent of GDP. By comparison, the ratio for Greece, notorious for tax evasion, stands at 31 percent. As the OECD points out, the country needs to widen its tax base to provide the health, infrastructure and social projects considered essential to improve the quality of life of Mexico’s 120 million people.

But the reforms will fall far short, says Mexico-watchers who say the tax take has to increase by three or four percent to achieve what is needed. “Representing barely a one percent additional share of fiscal revenue, [the package] will be insufficient to begin the process of weaning the government off Pemex’s revenues”, points out Andres Rozental of American think-tank the Brookings Institution.

The problem with Pemex
The country’s tax system is chronically top-heavy. Governments have relied for years on Pemex, the state-owned oil giant with 2012 revenues of $128.7bn, to keep the country’s accounts topped up. Indeed, Mexico has shamelessly milked the energy company’s profits. As the University of Pennsylvania’s Wharton business school points out, “Pemex pays out more than 60 percent of its revenues in royalties and taxes to the government, providing some 30 percent of total tax revenues”.

No wonder the company loses money despite its vast revenues. Pemex forks out four times as much in taxes as it invests, adds EMPRA, a Mexico City-based consultancy specialising in emerging markets.

While all three main political parties agree something must change, nothing will happen overnight in what is a highly political issue

It could be though that these reforms are tackling Mexico’s tax problems the wrong way round, say economists. Take, for example, the underground economy. Like other countries in the region, Mexico has a high level of informal labour that falls outside the tax net. If the government were to find ways of gathering these wages, the tax take would increase substantially.

Then there is Pemex itself. An infamously poor performer among international energy giants, it produces less oil now than it did a decade ago. Projected production for 2013 is approximately 2.5 million barrels, compared with 3.4 million in 2004. Meantime, other oil-rich countries such as Colombia and Brazil have doubled and tripled production. The problem? “Mexico has one of the world’s most closed oil and gas sectors,” explains Duncan Wood, Mexico specialist at Washington DC-based research institute the Woodrow Wilson Centre.

Oil workers in Mexico
Derrick hands working on a Pemex exploration oil rig. Mexico has long been reliant on the nationalised oil giant for income

While all three main political parties agree something must change, nothing will happen overnight in what is a highly political issue. Mexicans see Pemex as an almost untouchable national asset whose nationalisation in 1938 – the year foreign oil companies were kicked out – marked a turning point in the nation’s sovereignty. “The Mexican government wants to maintain control of the commercialisation of the oil for political reasons,” adds Wood.

The overall package barely merits a pass from most consultants. “The main fault is that it does almost nothing to widen the taxpayer base,” concludes the Brookings Institute’s Andrés Rozental, pointing out that it targets a capital middle class that already pays taxes and corporations that will only pass their costs on to consumers. Once again it seems Mexico will fail to amass the taxes due a country of its size.

Economic effectiveness: how an interim manager can help

Posted on by Ashton Wenborn

According to certain economic indicators, Europe could be creeping out of recession. Throughout the continent the media has become more confident and entrepreneurs speak more bullishly about investment.

More importantly, the money to finance such investment is beginning to crawl its way towards economically worthwhile projects from the vaults of lenders where it has festered for years.

Things are still slow compared to the good old days, but we are comforted by the knowledge that, although crashes come overnight, recovery creeps back slowly. It’s a matter of confidence. If recovery isn’t officially here yet, we are now talking ourselves into it, and it will be here soon.

Preparing for the unknown
At the outset of the crisis I offered my thoughts as a professional in corporate troubleshooting and interim management, to companies facing the onset of a world economic slowdown.

These thoughts focused on the critical and difficult actions companies needed to take: selling off or closing down low margin businesses, slimming the profit and loss account to hack out those “nice to have” expenses that had built up and were easily ignored during the good times, and concentrating on core activities in which the company had a comparative advantage over others.

In the end, the key differentiator of many of the companies that successfully rode out the recession was the ability to re-engineer their strategic outlook with the key purpose of surviving, and, if possible, protecting profitability.

[T]he key differentiator of many of the companies that successfully rode out the recession was the ability to re-engineer their strategic outlook with the key purpose of surviving

For many it was a distant philosophy from the one of perpetually enriching shareholder value through growth and improved profitability, which had formed the conventional wisdom before the crisis.

As companies now consider the prospect of an improving economic environment, that drive for increasing shareholder value is back on the agenda. If it never left the agenda, at least now it seems an achievable goal.

Managers are looking at strategic adjustments, acquisitions, and entering new markets with existing and new products. The “in limbo” years of survival are over and the return of focus on enhancing shareholder value is back.

Management is being challenged to make the most of the new order in the knowledge that the first mover will often gain the advantage. There are, however, three key problems many companies will encounter in getting to the starting blocks to manage these complex new challenges.

Companies may have people who are competent at the tasks required, but they are usually busy on their day-to-day jobs and are not able to apply themselves diligently to the specific tasks that require undivided attention.

Some companies struggle where a number may have people who know what needs to be done, but have not had prior experience in that area. This makes implementation slower, riskier and a successful outcome less certain.

Over time, companies may have developed accepted wisdoms whose justification is dubious, and whose authority is rarely challenged. It is difficult to dispel these from within.

Outsourcing professional assistance
This is where the Interim Manager can come in and add a new dimension, as this person is not an ordinary temporary worker used to fill a casual vacancy. It is someone who can become central to a company’s push for innovation, growth and investment; providing management, for a limited period, with the oxygen needed to cope with major new projects and change, while allowing them to carry on running the business.

They are professionals who dedicate their career to the provision of relevant services to business and normally come in at middle to senior management level. Interim Managers are widely available nowadays, and can be located through networks as well as through executive search agencies with dedicated departments.

A recent assignment

Cross-border acquisitions and mergers are always complex. Unfamiliarity with a foreign business environment, the potential for misunderstandings, and simply missing culturally different nuances, explain why so many internationally negotiated deals are never as attractive as first envisaged.

I was recently appointed by a group to work, initially, alongside an overstretched CFO in the process of assessing an overseas company for acquisition. The work culminated in my taking full responsibility for managing the business case analysis, the financial, commercial and legal due diligence, and negotiating the purchase price and key contractual terms and conditions.

The acquisition went ahead successfully at a price and with prospects that were generally considered to be beneficial to the buyer. My client’s knowledge that I had successfully managed such projects previously, that I had international negotiation experience and spoke the language of the vendors, allowed them to entrust the project largely to me.

The overstretched CFO ended up being less stretched, and I am now being asked to assist in certain aspects of the integration process into the mother group. One task often leads to another.

Before a company decides to hire an Interim Manager, it will have assessed the value of the additional expense of bringing such an individual onto the team. Interim Managers will tend to cost more than an equivalent level employee, although the cost will be much more flexible.

The company will also need to overcome the risk of a bad cultural fit, so that the manager can integrate and carry existing employees with him or her to a successful completion of the project.

This will require a series of meetings or interviews with different candidates, rather as in the hire of a full-time employee. So what are the key traits of an Interim Manager and how can he or she help companies avert the problems referred to above? The Interim Manager is a business leader, usually with considerable experience in corporate environments, who appreciates the goals of top management and is often able to work alongside them and manage large and complex projects.

They have expertise; can be left to their own devices and do not need to be supervised closely. This frees up company management to get on with running the company, and may avoid the need to hire an eventually more expensive long-term employee.

The Interim Manager is usually asked to carry out tasks they have dealt with before, with no requirement for on-the-job learning and has experience of navigating the pitfalls that disrupt or delay so many projects taken on by inexperienced teams.

It is key that they are independent and come to the job with an open disposition, an absence of pre-conceptions, history, allegiances, favours owed or owing, and are able to search for long-term alliances.

These traits allow the Interim Manager to avoid the politics and “treading on eggshells” that often mire organisations and prevent the right decisions being taken, for fear of going against a fashion or longstanding wisdoms (the so-called “sacred cows”).

Connecting for greater fluidity
Additional to these traits, there is an aspect of using an Interim Manager that many overlook and which transcends all others in the quest for effectiveness. It permits a level of fluidity to decision-making and action that is often difficult to achieve within companies.

The Interim Manager is usually hired with one particular objective or task in mind and he or she will be utterly focused on ensuring its successful completion. It is this last aspect, when combined with the wealth of experience and independence offered, that will make the use of Interim Managers so important in tackling strategically important projects when economic recovery arrives.

It is a certainty that the recovery will come, just as, proverbially, death and taxation cannot be avoided. Companies should already be thinking about aligning resources and selecting their external advisors.

The advice of an Interim Manager can even help companies manage their taxation. Maybe not avoid it, but certainly manage it better, which is worth considering.

Slim chances? Branson vies for Mexico’s telecoms market

Posted on by Ashton Wenborn

Never one to shirk a business opportunity and adopt the role of corporate underdog, UK billionaire entrepreneur and self publicist Sir Richard Branson recently announced plans to enter Mexico’s telecoms market – a market where local billionaire businessman Carlos Slim holds sway, largely to the exclusion of any serious competition (see Fig. 1).

Branson may have an estimated $4.6bn fortune according to Forbes, but it’s chump change compared to the $73bn amassed by Slim (as of early-2013) – much of it through his company, América Móvil, which dominates the Mexican telecoms sector – making him one of the world’s richest men, alongside Bill Gates.

Branson is no stranger to Latin America, however, having already rolled out his company’s Virgin Mobile Latin America (VMLA) brand there through a company formed in 2010 backed by investors, including Juan Villalonga, former CEO of Spain’s Telefónica.

Indeed, in June 2011 VMLA announced ambitious plans to become Latin America’s leading mobile virtual network operator (MVNO). Since then the company has commenced operations in Chile (through Virgin Mobile Chile in Q2 2012), having received regulatory approval from Chile’s Subsecretaria de Telecomunicaciones. In December 2012, meanwhile, VMLA confirmed the closing of a second debt funding agreement with IFC, the World Bank Group unit, to fund Virgin Mobile Colombia.

The Colombia debt facility of $14m increased IFC’s support for Virgin Mobile in the Latin American region to $25m, including its strategic funding for Chile, which has now signed up almost 200,000 subscribers and is set to break even this year. The Chilean and Colombian operations augment an existing network of Virgin Mobile operations in seven countries (Australia, Canada, France, India, South Africa, the UK and the US) serving approximately 20 million mobile subscribers.

Billionaire underdog
Befitting his corporate underdog image, Branson has already said that there is room in the market for his Virgin Mobile Mexico operations – due to be rolled out in 2014 – and that América Móvil would unlikely suffer much from Virgin’s presence in the country.

Unsurprisingly, Virgin Mobile Mexico will tread a well worn model used elsewhere and trade as an MVNO, thus obviating any need for massive capital investment such as the building of masts. Instead, it will buy airtime wholesale from América Móvil’s rivals and use the Virgin brand to differentiate itself in the market.

For Branson, the recent liberalisation of the Mexican telecoms market – ostensibly aimed at loosening Slim’s stranglehold on it by promoting more competition – presents an opportunity.

New regulations passed in May impose a 50 percent market share limit on the domestic market. For Slim, whose wire line Telcel network serves more than two thirds of Mexico’s 100 million mobile users and provides 80 percent of the nation’s landlines, they may yet force him to offload some of his assets.

Telmex, the country’s dominant fixed line provider – also owned by Slim – was fined $50m by the Comision Federal de Competencia (CFC) back in March for engaging in what the regulator described as anticompetitive practices. The fine came after an investigation on wholesale lines Telmex sells to other service providers operating in Mexico, such as Axtel. In Axtel’s case it was found that Telmex had failed to provide services for a period of two years.

Cofetel, Mexico’s then telecoms regulator, had previously announced (in March 2012) new rules requiring Telmex to incorporate price and quality controls on wholesale services sold to competitive service providers, in order to prevent dominant service providers (like Telmex) from indulging in conduct that would hinder the development of equal competition. Or hurt consumers through the fixing of arbitrarily high prices for the services offered. Moreover, Telmex would have to deliver these services to competitors with the same quality it would have provided its own subsidiaries and that service orders would need to be completed punctually. Seemingly, Cofetel’s edicts fell on deaf ears.

Regulatory strength
Yet it remains to be seen how strong the new telecoms reform bill – which also prescribes changes for the broadcasting industry – will be, given any company either fined or told to sell off its assets will retain the right to lodge appeals suspending those decisions, in effect amounting to corporate stalling tactics commonly used when fighting competition rulings.

However, proponents of the market reforms argue the new regime will strip away around 80 percent of the legal cover firms have previously been able to employ to thwart regulators.

As part of the liberalised framework, a new and autonomous regulatory body, the Federal Telecommunications Institute (Ifetel), which came into being in September 2013, has been given powers to grant and revoke broadcast and telecommunications concessions. It has taken over responsibilities from Cofetel. The bill also ends the current 49 percent limit on foreign investment in fixed-line telephony and raises the foreign ownership cap for television to 49 percent. It also creates a state-owned ‘carrier of carriers’ telecom network that would allow rival companies to bypass Slim’s existing network.

Previous requirements that only Mexican nationals could beneficially own a majority of voting shares in companies engaged in telecommunications services acted as a deterrent to new investment, even though foreigners had been permitted to hold additional shares of capital stock to reflect a larger economic participation. By dispensing with this policy, it should eliminate distortions and inefficiencies in the market, as well as make it easier for new entrants to acquire and recapitalise existing market participants who’ve thus far been unable to compete effectively with the incumbents.

$4.6bn

Branson net worth

$24bn

Virgin Group revenue (2012)

50,000

Virgin Group employees

Meanwhile, Ifetel’s plan to issue decisions on pricing, network unbundling and interconnection rates will, on the face of it, promote competition and drive down prices. But it could prove to be a double-edged sword for smaller domestic providers and would-be entrants, given revenues may be negatively impacted and, by extension, cash generation.

Issues needing to be addressed over the coming months include not only which players are market dominant, but also so-called ‘unbundling’ that would allow rivals cheaper access to the dominant player’s network.

Another possible solution is asymmetric price caps on Telcel or Telmex that would penalise companies run by Slim, but no one else. Unusually, the measures have been incorporated into Mexico’s constitution instead of simple enabling legislation, thereby shielding them, in theory, from constitutional challenges. Meanwhile, secondary laws have to be in place by December 9. The regulator is expected to have until early March to determine which companies are dominant in their markets and take the necessary measures to guarantee competitive conditions accordingly. It shouldn’t prove too difficult a task; given Slim’s América Móvil operation continues to be the veritable ‘beast in the jungle’. That isn’t to say he has no competition, even though his competitors could best be described as also-rans when it comes to market share.

Limited competition
Significant opposition is limited, but does include Mexican broadcaster and mass media company Grupo Televisa. It controls roughly 60 percent of Mexico’s broadcasting market, with rival TV Azteca – part of the Grupo Salinas conglomerate and headed up by CEO Ricardo Salinas Pliego – controlling most of the rest. While Televisa’s core market remains in broadcasting, it does have a six percent share of Mexico’s mobile phones market, through its Grupo Iusacell unit in which its broadcasting rival TV Azteca has also invested.

The elephant in the room though, insofar as Slim is concerned, may well be Spanish telco giant Telefónica. Acknowledging the changing regulatory landscape, Telefónica’s Mexican unit (Telefónica Mexico) recently said it wanted to triple its local market share by revenue; largely through selling more smart phones and Wi-Fi services and targeting small businesses to add to the estimated (end-March 2103) 20.5 million landline, wireless and data subscriber base it already has.

On an industry revenue basis, the company currently has a wireless market share of 12 percent, but a customer base market share of 20 percent. Respectable numbers, yet hardly earth-shattering when set in the wider context.

As the OECD noted in its January 2012 Review of Telecommunication Policy and Regulation in Mexico, lack of competition in the Mexican market had led to inefficient telecommunications companies imposing significant costs on the Mexican economy and burdening the welfare of its population. It further noted a sector characterised by high prices – among the highest within the OECD countries – resulting in poor market penetration rates and low infrastructure development, leading to a loss of benefit to the economy estimated at $129.2bn over the 2005-09 period alone, or 1.8 percent GDP per annum.

While there had been growth in mobile, fixed, broadband and pay-television markets, Mexico compared unfavourably with other OECD countries that had developed more open and competitive markets and distributed the ensuing benefits to consumers. In addition, profit margins of the incumbent (América Móvil) were much higher than the OECD average, while investment per capita was lower than in any other major country.

Underperforming monopoly
Aside from Slim’s potential mounting pressures on the domestic front he has very real issues to deal with now – not least a consistent thumbs-down from the stock market reflecting, among other factors, disappointing investments, principally in Europe. Unsurprisingly, the company’s share price has, more often than not, underperformed Mexico’s benchmark IPC index of late.

It isn’t difficult to see why. The company witnessed a 46 percent profit slump in Q3 2013 to MXN 16.384bn ($1.25bn) from MXN 30.45bn pesos in the same period a year earlier, as customers made fewer phone calls and the company’s financing costs soared.

Almost half of the company’s core profit comes from Mexico, where service revenues, or income from customers’ phone calls, dropped 1.4 percent. Total revenue, though, rose 0.7 percent to MXN 194.221bn, helped by gains from selling more expensive mobile phones.

Another galling thing for Slim has been the company’s seemingly faltering European strategy, as he has sought to diversify away from the home market. Investors had already voiced concerns that América Móvil’s near-23 percent investment in Telekom Austria could follow the same path as its KPN investment, where a rights issue earlier in 2013 forced the company to buy more shares at a lower price to maintain its participation. Many thought that América Móvil, which had accumulated nearly 30 percent of KPN, was outmanoeuvred when its holding was effectively chopped in half after a foundation set up to protect the interests of KPN shareholders executed an option to acquire almost 50 percent of KPN’s voting stock. Slim had accumulated his 30 percent stake, paying an average €8 per share, while his subsequent €7.2bn ($9.5bn) €2.40 a share offer in August this year (for all remaining stock he didn’t already own) was deemed too low. Having walked away after the bid was rejected Slim ended up sitting on a loss estimated at around €850m-900m. The ball firmly remains in Slim’s court, however, and he may yet come back in with a revised offer.

$73bn

Carlos slim net worth

$59.3bn

América Móvil revenue (2012)

158,694

América Móvil employees

Despite this setback Slim has deep pockets and won’t be deterred from seeking other European opportunities, though not necessarily at any cost. Ratings agency Fitch expects América Móvil’s net debt-to-EBITDA to remain stable during 2013 and to trend slightly downward in 2014. While its expectations for the long-term net debt-to-EBITDA is approximately 1.2x – a level slightly higher than its previous expectation of 1.0x – Fitch still considers this within the limits of the company’s current rating category.

Digital media research group eMarketer estimated (in a December 2012 report: As Mobile Gains Ground in Mexico, Advertisers Take Note) that the number of mobile connections in Mexico was 98 million in 2012, equal to 85.2 percent of the total population. By contrast, the number of mobile connections as a percentage of population in Brazil was 134 percent, according to its estimates. If these numbers suggest the Mexican pie can become larger, the big question remains as to whether it will amount to anything more than a few crumbs for new market entrants such as Sir Richard Branson – even after factoring in the long standing political pressure that has been heaped on Carlos Slim. Much will depend upon the political and economic will of regulators.

For his part, Slim remains comfortable, saying in a recent interview that he doesn’t think profitability in the newly liberalised domestic landscape will be any problem, arguing it is coming from productivity, efficiency, management, austerity, and the way the business is managed.

He also probably has bigger fish to fry than Richard Branson.

Transfer pricing: using technology to avoid the pitfalls

Posted on by Ashton Wenborn

Failure to address the difficulties many companies face with transfer pricing can lead to significant business risks, such as financial reporting issues, increased tax liabilities, and higher costs in terms of intercompany accounting and tax compliance.

To meet this challenge, many companies are adopting a holistic approach to executing transfer pricing – one that integrates the transfer pricing process with day-to-day operations.

Companies are also exploring new ways to improve transfer pricing processes and leverage technology to drive efficiencies and reduce risk. When taken as a whole, this approach is referred to as Operational Transfer Pricing.

The role of technology
Transfer pricing user requirements beyond intercompany eliminations are commonly scoped out of major technology upgrades or new implementations. As a result, transfer pricing implementation frequently involves offline or manual processes across multiple departments, regions and systems, adding time, cost and risk to the close process. Many of these inefficiencies can be alleviated by enabling technologies.

Technology further improves data gathering and quality of information which supports the enhanced integrity and monitoring of intercompany transactions

Companies that integrate technology may be capable of achieving significant benefits. Streamlined processes and controls can help companies drive earnings per share through greater realisation of tax planning goals and possible reduction in FTEs, while shifting tasks from routine to value enhancing.

Technology further improves data gathering and quality of information which supports the enhanced integrity and monitoring of intercompany transactions, as well as the ability to efficiently manage workflow and compliance requirements. These enhancements may increase financial reporting accuracy and timing, and reduce financial statement and tax audit risk.

A wide spectrum of tools exists to support the intercompany transfer pricing process. These can be broadly categorised into policy management, policy implementation, and compliance tools.

Many companies choose to work with a consulting professional to determine ‘best fit’ based on technology user requirements and the companies’ overall information technology landscape.

In developing a transfer pricing policy, companies should identify intercompany transactions, align intercompany agreements with transfer pricing policies, and design methods to facilitate the implementation of these polices.

Policy management and implementation 
Workflow tools can support the entire transfer pricing process by facilitating information-gathering activities and providing a well-structured database for maintaining documents to support a company’s transfer pricing policies.

Benefits can include improved data quality and enhanced monitoring and reporting capabilities, which can enable companies to promptly identify and mitigate areas of risk

The potential benefits of such tools include oversight of tax and non-tax compliance requirements, centralised documentation storage and standardised reporting across the organisation.

Technology can also be used to help protect the integrity of transfer pricing data used for reporting and compliance, by ensuring that accounting procedures are integrated with transfer pricing policies and results are monitored regularly.

Easily identify areas of risk
Leading tools in this area feature automated calculation of segmented transfer pricing results, near real-time monitoring of intercompany profits, and the ability to make prospective unit price adjustments throughout the year.

Benefits can include improved data quality and enhanced monitoring and reporting capabilities, which can enable companies to promptly identify and mitigate areas of risk, plan and execute efficient tax structures, and make better-informed business decisions. Critical to the success of a transfer pricing policy implementation is cost-effective and efficient compliance management.

Tools within this area can support the step-by-step preparation and maintenance of transfer pricing documentation in accordance with local and global tax requirements. Key features include benchmarking resources, information on current transfer pricing rules and requirements, and ready-to-use report templates. Workflow capabilities enable real-time project tracking, review of documentation content and centralised information management.

KPMG member firms have operational transfer pricing professionals around the world who apply in-depth knowledge of global transfer pricing practices and market leading technologies to help companies effectively manage their global transfer pricing obligations.

For further information email Bernhard von Thaden (Los Angeles) at bvonthaden@kpmg.com; Jerry Klopfer (Chicago) at jklopfer@kpmg.com; Marco Pace (New York) at marcopace@kpmg.com; Komal Dhall (London) at kdhall1@kpmg.co.uk;

BTG Pactual invests in Europe’s public-private partnerships

Posted on by Ashton Wenborn

Recently, Spain has been labelled an economic wasteland beyond all reasonable chance of repair, so much so that investment has waned to quite extraordinarily low levels. Growth has stifled as confidence in the eurozone’s fourth largest economy has taken a nosedive. Nonetheless, analysts believe that Spain’s fortunes are on the upswing, and that PPPs are likely to play a significant part in boosting the region’s prospects.

Reaching global shores
While a propensity for privatisation is certainly gaining ground in Spain, the benefits are far from exclusive to European shores, with nations as far afield as Latin America turning to PPPs as a means of plugging the infrastructure gap and generating economic growth (see Fig. 1). Aside from boosting government coffers, PPPs can also serve to revitalise consumer confidence, improve efficiency and lessen the burden on the public sector – these being circumstances that have too long plagued a global economy in decline.

One of the clearest examples of a PPP having benefitted fragile Spain is with the privatisation of the Catalonian toll road Túnels de Barcelona e Cadí. The deal – which was jointly undertaken by Invicat (fully owned by Abertis) and Latin America investment banking firm BTG Pactual – amounted to a settlement worth €430m in December 2012, and serves as an example of how privatisation can breed success.

“We participated in the water privatisation process soon after looking at this opportunity, and concluded that it was certainly interesting,” says Renato Mazzola of the Toll Road Concession, who is head of Infrastructure investments at BTG.

The multinational firm previously co-headed a consortium, along with ACCIONA, in what amounted to a €1bn water privatisation deal that extended to an estimated five million people across Catalonia. The company believes this second Catalan project – though worth less –is of an equal if not greater importance to a country in the midst of economic turmoil, stating that the privatisation of key infrastructure links can so often serve to stimulate economic growth.

“Privatisation can bring unparalleled benefits to the project with respect to procedures, maintenance and operations in a way that governments cannot,” says Mazzola. “I think when you have a private rather than a state operator, you’re able to utilise synergies from other assets around the world, and combine them in such a way that the project is made more efficient.”

Privatisation can bring unparalleled benefits to the project with respect to procedures, maintenance and operations in a way that governments cannot

Georgiana de Grivel, BTG’s Investor Officer told World Finance, “private ownership usually enhances the quality of the service in question because the party’s interests lie with customer satisfaction as, at the end of the day, that’s what’s going to bring more customers into the fold.”

Benefits beyond profit
PPPs also offset the burden on taxpayers and shift accountability to rest with private as opposed to public parties, in effect lifting consumer confidence and restoring a measure of satisfaction to an otherwise disillusioned public. Mazzola believes the concession to be crucial in spurring economic growth in Catalonia, “not only can the government actually raise the money to comply with financial requirements, but reallocate resources elsewhere, whether it be to areas where there is a greater need for investment or ones where the private sector is not necessarily interested in investing.”

“PPPs can also bring further infrastructure investment to the region,” says de Grivel. “For local and international investors who may well have been wary of investing in the past, having an international player involved will serve as a comfort to those who are undecided on the region.” The toll road privatisation has given the government an immediate sum of €310m, with the remaining 28 percent due to be paid on completion of the concession period 25 years down the line.

Mazzola states that, “for the government, it was important that they were able to raise the money they needed in order to meet their primary financial requirements. I think it was a win-win situation for all parties involved.” BTG won the concession through a rigorous bidding process, which saw the firm put together an incredibly attractive proposal.

“I think a lot of people believed the concession would not draw any bidders, but we were able to work an attractive project finance structure with a few commercial banks – and obviously in any infrastructure project financing is key.

“When we were bidding for the project the market conditions were extremely bad, there were very few banks willing to put money on the table, but given the close relationship that BTG and Abertis have with several commercial banks I think the banks were willing to commit the financing on this occasion.”

Pre-established experience
Speaking on the supposed reasons why BTG was selected, de Grivel says, “I think we also had an attractive consortium for the government being an investor group with further plans of investing in the region, and a proven operational track record through Abertis. “The Spanish conglomerate accounts for the majority of toll road concessions in the region… this same partnership was also attractive for banks given our experience in the sector.” Investment in infrastructure is something that BTG are all-too-familiar with, being headquartered in Brazil and believing – as so many do – that Latin America as a whole demands a huge infrastructure drive if it is to sustain its gains in the near future.

“Latin America in general is lagging behind compared to other regions in the world,” says Mazzola. “There is no question whatsoever about the need for infrastructure in Brazil, Colombia and Peru. However, this need is not excluded to larger nations and extends to smaller Latin American economies such as Paraguay as well.”

Deficiencies in Latin American infrastructure are well known, and are so often cited as one of the principal factors inhibiting the native emerging markets from progress. “If there is one economy that is ahead of the game then it is Chile, however the vast majority of Latin American nations require an upturn in infrastructure investment, and for this reason many governments have made this their primary focus.”

With government budgets squeezed and the infrastructure gap widening– $200bn a year according to Reuters – the onus lies more so with private players to cement a stronger platform from which Latin America can thrive.

BTG has invested in a number of infrastructure assets in Latin America and have in part contributed to what have been a productive year in terms of bolstering transportation, power, telecommunications and oil and gas assets

Although the likes of Brazil, Peru and Colombia have fallen behind somewhat on the infrastructure front, BTG has invested in a number of infrastructure assets in Latin America and have in part contributed to what have been a productive year in terms of bolstering transportation, power, telecommunications and oil and gas assets. “More foreign and local capital is being allocated to infrastructure, although I think the region as a whole requires a lot more investment in the future,” says Mazzola. “We do see a lot of international – especially European – investors participating in the region but most have seen a number of very strong and active local players emerge recently. “Obviously a combination of foreign and local capital in the region is always appreciated, but most importantly we must continue to see governments and private sectors build upon exiting infrastructure so that they’re able to guarantee the future economic success of the region.”

Speaking specifically about the measures BTG have undertaken to develop the region’s infrastructure, Mazzola is confident of further growth. “We’ve just raised a second infrastructure fund amounting to $1.8bn, which is the largest infrastructure fund in the region, and we are mainly focusing on oil and gas, energy, telecommunications and logistics, which represent the four areas of investment that we’ve already made.

“We’re also looking for opportunities in the water sector, so there’s quite a few areas that I think are targets for us as we look for one of these five opportunities.” As demonstrated by the Catalonian highway concession, PPPs can so often be the key to economic growth. Recognising that there are many more opportunities of this sort to be had overseas, BTG this year co-headed a $1.5bn joint venture to acquire a 50 percent stake in state-owned Petrobras’ African assets in Angola, Benin, Gabon, Namibia, Nigeria and Tanzania.

“We’re going to continue with our focus on Europe and Latin America so that we’re able to participate in markets outside of Brazil, which is the case right now in Chile too. We’re very optimistic about our current investments, and we’re confident that there are some great investment opportunities in many major regions across the globe.”

China’s economic growth slows

Posted on by Ashton Wenborn

Even though it has propelled the global economy for much of the last decade, recent figures have shown China’s economy is slowing down to its lowest rate in 14 years. Official figures released today reveal that GDP growth for 2013 was 7.7 percent, down 0.01 percent on the previous year’s number.

Despite this slump, growth was higher than the government’s pessimistic target of 7.5 percent. China has sought to rebalance its economy in the last year, with an effort to step back from the heavy investment that has bolstered growth over the last decade. Instead, the regime has looked to encourage more of a domestic consumption-fuelled economy.

Despite this slump, growth was higher than the government’s pessimistic target of 7.5 percent

Many observers feel that this slow down in growth is not the disaster some think it might be, as it signifies a step towards a more realistic and sustainable level economy. HSBC’s Qu Hongbin, Co-Head of Asia Economics Research and Chief Economist for China, said in a note that China had ended 2013 on a “firm footing”.

“Fourth quarter GDP growth came in a tough higher than expected at 7.7 percent year-on-year, taking full year GDP growth to 7.7 percent, above the official target of 7.5 percent. Overall this sets the stage for Beijing to push forward its economic reforms in 2014. We expect the growth momentum to be maintained in the coming year thanks to the improving external outlook, ongoing reform measures designed to boost private investment and consumption, and the stable and supportive policy stance in the context of mild inflationary pressures.”

Reacting to the news, Mizuho Securities analyst Jianguang Shen said that consumption had remained “relatively resilient”. “Improving exports and resilient consumption were positive trends starting from Q4 2013, but investment growth began decelerating, mainly due to borrowing costs and increasing stress in the shadow-banking sector. We expect this divergent development…to continue in 2014.”

Announcing the news, China’s National Bureau of Statistics (NBS) chief Ma Jiantang said that it was a “critical period” for the country’s economy. “Generally speaking China’s economy showed good momentum of stable and moderate growth in 2013, which is a hard-earned achievement. However, we should keep in mind that the deep-rooted problems built up over time are yet to be solved in what is a critical period for China’s economy.”

In a note to investors, Shen agreed that the government faces a difficult balancing act in the coming months. “The government is faced with the difficult task of pushing for structural reforms whilst at the same time trying to avoid the risks associated with radical changes. We maintain our 2014 GDP growth forecast of 7.6 percent year-on-year, assuming that the government can fend off a full-blown financial crisis.”

Dr Hazim El-Naser, Thomas Langford, Anne De Pazzis on the As-Samra Wastewater Plant | SPC Samra | Video

Posted on by World Finance

As-Samra Waste Water treatment plant is the largest of its kind in Jordan. It’s also the first project in the country to be built under a build, operate and transfer model. Dr Hazim El-Nasser from Jordan’s Ministry of Water and Irrigation joins Thomas Langford from CCC and Anne De Pazzis from Degremont, the sponsors responsible for the BOT model, discuss the advantages the project will have for the people of Jordan, and the way the country has benefited from commissioning the project as a public-private partnership.

World Finance: Your Excellency, the first phase of the project addressed, among other things, the problem of a severe water shortage in Jordan. How bad was this, and did As-Samra address this?

Dr. Hazim El-Nasser: Jordan is one of the most scarce-water countries worldwide, classified by international indices as number 3. By constructing this treatment plant, Jordan was able to reallocate more freshwater from irrigated agriculture towards the most urgent needs of the domestic water sector, and by releasing more freshwater.

“As-Samra Waste Water Treatment Plant was the first build-operate-transfer PPP in Jordan”

World Finance: How has the construction of the original plant helped to address environmental and health concerns in Jordan?

Dr. Hazim El-Nasser: By the completion of this treatment plant, we were able to connect more households to the public sewage networks and thereby enhancing environmental and health standards. Most important is the protection of our precious underground water resources from pollution through septic tanks.

World Finance: Why was the plant expanded at this time?

Dr. Hazim El-Nasser: As you might know, Jordan is in the troubled Middle East, and a lot of people influx to Jordan as a result of regional conflict. On top of that, Jordan is witnessing economic development and a high population growth rate, which makes the need for additional freshwater services for households.

World Finance: How has Jordan benefited from commissioning the project from a public private partnership?

Dr. Hazim El-Nasser: As-Samra Waste Water Treatment Plant was the first BOT in Jordan, and the first in the region, and by doing this BOT, we were able to attract more private sector participation into water and infrastructure projects, and other sectors, energy infrastructure and so on. This was very important, especially in countries going under structural and physical reforms; they need such a financing so they will have less borrowing, especially if they have limitations on their borrowing capacity.

“The timing of the financing was difficult: the markets in Europe, plus the situation in Jordan where the deficit was increasing”

World Finance: Well Thomas, over to you now, and as a sponsor what are the main financing and structuring issues for this project?

Thomas Langford: Well, this expansion was built on the existing plant. BOTs and PPPs are very difficult concepts to implement. In this particular case, we had to complement the inclusion of MCC and their requirements in the project. Secondly, the timing of the financing was difficult. The markets in Europe, because of the financial crisis, plus the situation in Jordan where the deficit was increasing, the country was suffering because of the reduction of the gas supplies from Egypt, made it somewhat difficult, and we had an overall constraint on affordability.

World Finance: Well what financing mechanisms did you use to deal with these issues?

Thomas Langford: We decided to approach it as a brownfield project and combine the existing plant together with the expansion. This allowed us to use the continuing operations of the plant, help in the securitisation of some of the payments that the sponsors were making. It allowed us to leverage the existing plant, which reduced the equity requirements for the new plant.

World Finance: Anne, this is the first BOT project for MCC, so what challenges did you face in its implementation?

Anne De Pazzis: Challenges arose in the course of the discussions. The first reason is that MCC was undertaking its first BOT co-financing with the private sector in this project, and they were involved in all aspects of the negotiation of all documents. Secondly, the expansion was a negotiated project because the original agreement provided for direct negotiation between MWI and the project company as an anticipation for a needed expansion of the treatment plant. Therefore, MCC had to develop thorough cost analysis methodology to assess our proposal and ensure that the price is reasonable. Finally, MCC requires strict adherence to its conditions and requirements, as well as to international standards. In that respect, MCC imposed very strict conditions on the EPC contractor, such as trafficking persons, and on the operator as well when it comes to sludge management.

“If affordability is a must for such long term contracts, acceptability is also something of importance”

World Finance: Well can the As-Samra model act as a template for future developments?

Anne De Pazzis: It is a reference, from an environmental standpoint, renewable energy is produced from biogas capture and hydraulic energy. It is self sufficient at roughly 95 percent, and as part of the expansion agreement the parties have also agreed to improve sludge management practices and pursue viable reuse options for sludge. Secondly, the viability gap funding approach, through the contribution of MCC, was absolutely critical to the development and the expansion. Through this contribution the project is much more affordable for the government of Jordan and financially attractive to the banks and the sponsors.

And lastly, if affordability is a must for such long term contracts, acceptability is also something of importance. In the case of As-Samra, effective stakeholder engagement has occurred from the early stages of the project. Since its origin, throughout the current operation of the existing plant, as well as during the development of the expansion. And I strongly believe that this inclusive approach has benefited the project and all parties in the end.

World Finance: Your Excellency, Ann, Thomas, thank you.

Dr Hazim El-Naser, Thomas Langford, Anne De Pazzis: Thank you.

Can Obama save his legacy?

Posted on by Ashton Wenborn
United States President Barack Obama
Obama listens attentively during a January 2014 meeting with young people who are helping with healthcare enrolment efforts. The President wanted to hear about their experiences in spreading the word about the importance of signing up for affordable healthcare insurance

Hailed as the saviour of the western world and heralded as the champion of a new dawn of politics, the reaction that greeted Barack Obama’s victory in the 2008 US Presidential election reached absurd levels of hysteria. The expectation that surrounded Obama was so high that many people thought he would be able to deftly solve the biggest financial crisis in nearly a century, while at the same time overhauling the country’s much criticised healthcare sector and improve the US’s damaged global reputation.

The reality, however, has been somewhat different. While the economy has got back on track, it has hardly been as a result of a new form of conciliatory deal making in Washington. Nor has he made good on many of his promises, from closing the Guantanamo Bay detention camp to curbing lobbying in Washington. Countless promises made in his initial campaign have either been watered down or completely ignored, resulting in his many supporters decrying his lack of progress.

As successfully re-elected presidents enter their second terms they often look towards implementing some form of ambitious, headline grabbing policy that will secure their legacy for decades to come. Freed from the shackles of having to think about another election campaign and keeping people onside, second term presidents are often successful at getting more done than in their initial terms. However, with so many criticisms over broken promises and political cooperation at an all-time low, many wonder whether Obama will be able to salvage some form of legacy in the remaining two years of his presidency.

[W]ith so many criticisms over broken promises and political cooperation at an all-time low, many wonder whether Obama will be able to salvage some form of legacy in the remaining two years of his presidency

More often than not legacy-building comes in the form of foreign policy initiatives, with both George W Bush and Bill Clinton attempting to force progress on the Israel-Palestine issue. In this instance, Obama has similarly sought to make his mark in the last few months. A ground breaking deal with Iran over its nuclear ambitions should be hailed as a significant step towards bringing back into the fold what has been a troublesome player in the world’s most volatile region, even if it was condemned by many as having isolated the US’s traditionally close ally Israel.

Moves by Obama to force an agreement between Israel and Palestine should also be welcomed, although whether he will have any success in persuading intransigent Israeli Prime Minister Benjamin Netanyahu to adopt a plan based on 1967 borders remains to be seen, especially after the supposed betrayal over the Iran deal.

However, much of the attention should be on settling the issue of Syria. Obama’s indecision over action in Libya was followed by his failure to stick to his ‘red line’ threat to President Assad over the use of chemical weapons, conceding the initiative to Russian President Vladimir Putin. In the coming year, he should look to seize back that initiative by making it abundantly clear to Assad that a conclusion to the fighting in Syria must be reached. While military action should be seen as a last resort, any further uses of chemical weapons should result in the harshest of actions from the international community – led by the US.

Obama’s much-anticipated assault on the private healthcare industry barely made it through fraught negotiations with Senators and Representatives, resulting in a much-watered down version of his initial proposals. What was eventually launched towards the end of 2013, Obamacare, was beset by online technical problems, further harming his reputation and giving his administration an air of incompetence. Critics highlighted basic faults in the website that people needed to sign up to, and the money invested in running the programme was clearly misspent.

Even though he promised to curb the sort of surveillance tactics that had become popular during the Bush administration – such as the Patriot Act – Obama suffered an embarrassing 2013 as a result of the Edward Snowden revelations over domestic and overseas spying by the National Security Agency (NSA). Scolded by international leaders that included Germany’s Chancellor Angela Merkel and French President Francois Hollande over the NSA’s supposed tapping of their phones, Obama must use 2014 as the year to rebuild these relationships and improve trust. Recently announced plans to protect foreigners from NSA spying, as well as a demand for presidential approval for spying on foreign leaders, is not enough.

He should start by pardoning Snowden. An act of heroic whistleblowing or despicable treachery – depending on how comfortable you are with government snooping – Snowden has been stuck in Russia seeking political asylum since his revelations in June last year. Even though he revealed hugely damaging information about the US’s surveillance activities, he has highlighted a worrying lurch towards government distrust of its citizens and its allies. For a country that so fervently promotes freedom of speech and expression around the world, it is depressing to see it collect such vast swathes of information about people that it may use against them.

Obama has undoubtedly been a huge disappointment to those who so passionately hailed his election in 2008. However, it is not too late to salvage his presidency and address many of the things he set out to achieve in the first place. Saving his healthcare reforms is also possible; provided he brings the right sort of people into oversee it. Closing Guantanamo Bay would be a symbolic move, as would bringing about some more dialogue between Israel and Palestine. Tackling Syria is even possible if he has the courage of his convictions.

A presidency that offered so much has been hampered by Obama’s relative belligerence in dealing with opponents. Now that he doesn’t need to worry about being re-elected, he should be bolder and more forceful if he’s going to be remembered as anything more than a damp squib.

Iran’s nuclear deal: problematic or progressive?

Posted on by Ashton Wenborn

An “historic mistake” that had made the world a “much more dangerous place” is how Israeli Prime Minister Benjamin Netanyahu described the recent agreement between Western leaders and Iran. The deal set out in Geneva and negotiated in November between Iran and the so-called P5+1 group of nations – the US, UK, France, Germany, Russia and China – took many sleepless nights to finalise.

Iran’s nuclear deal in pictures

Mahmoud Ahmadinejad Former Iranian President Mahmoud Ahmadinejad at the United Nations General Assembly in NYC, 2012 Ali Larijani Iran’s parliament speaker and former Tehran’s top nuclear investigator Ali Larijani speaks to members of the press in Geneva, SwitzerlandJohn Kerry
US Secretary of State John Kerry addressing a press conference during talks on Iran’s nuclear programme in Geneva, Switzerland

Satellite image of Arak Nuclear Reactor in Iran
A satellite image of the Arak Nuclear Reactor in Iran. Construction will continue despite global disdain

The hope, however, is that it will lead to far greater engagement between the West and what has been a thorn in the side of the pursuit for peace in the Middle East. With this renewed, if tentative, step towards cooperation with the rest of the world, Iran is at an intriguing crossroads.

On one path is further engagement with the international community, potentially leading to an inflow of foreign capital and a boost to its industries. On the other is a continuation of the double-dealing, mischievous approach that has caused the country to be shunned – and sanctioned – for so long.

The country’s rumoured intention to secure a nuclear weapon has caused strife across the Middle East for more than a decade now. While it has always maintained it is purely pursuing a peaceful nuclear energy programme, concerns from the international community meant burdensome sanctions have decimated its economy.

Getting to a point where Iran sat round a table with world leaders – and most importantly the US – has been a long and torturous affair. Since the revolution in 1979, the country has presented the US as the ‘Great Satan’, stirring up anti-Western sentiment for more than 30 years. Its relations with its regional neighbours have been fraught with conflict and distrust, and Iran is seen as a troublesome presence by Israel, Saudi Arabia and Iraq.

A wolf in sheep’s clothes?
The election of 64-year-old Hassan Fereydoon Rouhani in June 2013 was heralded by many as a move towards moderation for the country, an encouraging sign after the pantomime-villain that was President Ahmadinejad. With a campaign slogan of “moderation and wisdom”, he has been praised for his stance on civil rights, the economy and his willingness to seek a diplomatic solution to the issue around Iran’s nuclear capabilities.

However, some are sceptical of his moderate credentials, pointing out that he was approved by the conservative Guardian Council that has the ultimate control in the country. They point out that the Twitter-using Rouhani may just be the acceptable face of a still extremely conservative, religious regime.

Author Cyrus Massoudi, whose Land of the Turquoise Mountains covers his account of a modern Iran, said that while it was important to be wary of previous examples of candidates not matching their moderate rhetoric, the new strategy of engaging with the West was encouraging.

“Every candidate that runs for presidency has been approved by the regime and in the majority of cases will have been a part of it at some stage. Rouhani is no exception. As has been seen in the past, genuine progressive intentions do not necessarily translate into lasting reform, but this new rapprochement with the West may herald a need to revise certain attitudes.”

Economic reforms
With an economy that is 50 percent planned by the government, Iran’s government needed to make some form of concession to the West in order to loosen the sanctions. Dominated by oil and gas production, the country’s exports have been hampered by an out of control currency and restrictions on the export market.

Both the food and energy markets are heavily subsidised by the regime, which has placed a considerable burden on the economy. While recent years have seen attempts to reduce the subsidies, more reforms are needed if the country is to attract private-sector growth and foreign investment.

The overreliance on oil and gas – Iran has the second largest natural gas reserves in the world, and the third largest oil reserves – has meant that restrictions on energy exports have seriously damaged the economy (see Fig. 1). The deal with the West should, in theory, lead to the economy getting a much-needed shot in the arm.

Iran value of exports graph

However, according to Massoudi, wider reforms are still needed. “The longer-term implications are dependent on whether the terms of the deal are upheld by the Iranian regime. That there has been successful dialogue for the first time in over 30 years is in itself a positive step – everywhere outside of Israel and Saudi Arabia at least – but only the start of what will no doubt be a long and tortuous process.

“In the short term, the freeing up of vital oil revenues will give the economy the shot in the arm it desperately needs but President Rouhani’s stated goals of stabilising the currency and curbing inflation are still a long way away and will be reliant on a more permanent loosening of the sanctions.”

News of the deal caused Iran’s currency – the rial – to immediately jump more than three percent against the dollar, as hopes were raised that the economy would recover from the sanctions. Iran’s currency has fluctuated wildly in recent years as a consequence of the currency rates.

The government’s attempts to bring it under control, as well as reducing the key problem of an inflation rate of about 40 percent, has been erratic over the last couple of years. Former President Mahmoud Ahmadinejad was heavily criticised for his policies, and so it is hoped that the more moderate Rouhani will be able to get things under control.

As part of the deal, $4.2bn worth of oil revenues will be unfrozen, as well as $1.5bn worth of revenues from trade in gold and precious metals. Although negligible compared to the $30bn worth of revenues from oil that the country will miss out on over the next six months due to sanctions, it will certainly help things.

Despite the deal, US President Obama has maintained oil sanctions on Iran

Massoudi also believes that President Rouhani will try to put a block on cheap foreign imports in order to help the country’s agricultural and industrial sectors. “President Rouhani has identified the need to curb the reliance on cheaper foreign imports in an effort to revitalise the largely ailing industrial and agricultural sectors as a means to future economic stability, but more immediately oil and gas revenues should see the sharpest increase.”

Despite the deal, US President Obama has maintained oil sanctions on Iran. He said in a statement, “There is a sufficient supply of petroleum and petroleum products from countries other than Iran to permit a significant reduction in the volume of petroleum and petroleum products purchased from Iran by or through foreign financial institutions. I will closely monitor this situation to ensure that the market can continue to accommodate a reduction in purchases of petroleum and petroleum products from Iran.”

US Secretary of State John Kerry, who helped to broker the deal, added, “The Joint Action Plan agreed in Geneva does not offer relief from sanctions with respect to any increases in Iranian crude oil purchases by existing customers or any purchases by new customers.”

However, Iranian oil minister Bijan Zangeneh told reporters in December that the country planned to increase oil output, regardless of whether crude prices fell. “Under any circumstances we will reach five million barells per day even if the price of oil falls to $20 per barrel. We will not give up our rights on this issue.”

Israeli scepticism
The issue of Iran obtaining a nuclear weapon is still of great concern to Israel, however. The country has led the calls for sanctions to continue, having been the main cheerleader for the policy that has restricted Iran for the last decade. While the deal will see Iran’s uranium enrichment programme be restricted to the five percent civilian level, as well as daily inspections from UN observers, it is not enough for Netanyahu.

The morning after the deal was announced, he condemned what he perceived to be an overly generous concession that Western leaders had made to Iran. “What was achieved last night in Geneva is not an historic agreement, but an historic mistake. Today the world has become a much more dangerous place because the most dangerous regime in the world has taken a significant step toward attaining the most dangerous weapon in the world.”

Speaking in a subsequent trip to Rome, Netanyahu said, “There is a rush to accommodate Iran as if it has changed anything in its policies. The Iranian regime, though it smiles, continues to butcher people in Syria and sponsor terrorism.”

In an attempt to justify the sanctions over the last decade, Netanyahu said, “Great work has been done over the past decade in putting powerful, binding sanctions on Iran. These sanctions have been eased, but for what in return? We need substance, we cannot be satisfied with political theatre.”

He was also dismissive of Rouhani and the supposed moderate tone the country was now taking. “I would like to dispel any illusions. Iran aspires to attain an atomic bomb. It would thus threaten not only Israel but also Italy, Europe and the entire world. There should be no illusions about this charm offensive.

“Today there is a regime in Iran that supports terrorism, facilitates the massacre of civilians in Syria and unceasingly arms its proxies – Hamas, Hezbollah and Islamic Jihad – with deadly missiles. If tangible steps are not taken soon, it is liable to collapse and the efforts of years will vanish without anything in exchange,” he said. “But at the same time, I tell you and promise in the spirit of the Maccabees, we will not allow Iran to receive a military nuclear capability.”

A country that has such a rich and varied cultural history, as well as the foundations to be an economic powerhouse, has been in the international wilderness for far too long

Equally concerned about Iran’s new acceptance by the West was Saudi Arabia. The country worries that its regional dominance in the energy market would be under threat from a newly unshackled Iran. However, Iran’s Foreign Minister, Javad Zarif, has been keen to stress his country’s determination to engage with the Saudis. On a recent tour of the Gulf, Zarif said the deal with the West should not be “at the expense of any country in the region.”

“We look at Saudi Arabia as an important and influential regional country and we are working to strengthen cooperation with it for the benefit of the region,” he added.

Improving relations with its neighbouring countries is essential if Iran wants to be welcomed back into the international community. For years it has sought to antagonise the likes of Israel and Saudi Arabia, while stirring up trouble in Iraq and Syria, with no bigger proponent of this tactic than former President Ahmadinejad.

Massoudi believes that until it addresses these issues, sanctions will not be removed. “Iran will need to revise its foreign policy towards these countries if it is serious about building long-term bridges and working towards a more permanent alleviation of the sanctions.”

A new era of calm
A country that has such a rich and varied cultural history, as well as the foundations to be an economic powerhouse, has been in the international wilderness for far too long. While it has been an antagonistic presence in the region for many years, increasing cooperation with the international community is the only way that calm will be brought to the region.

As sanctions have tightened their grip on the country’s economy, the regime has been faced with a choice of continuing with decade-old policies or engaging with the world and moving forward. More sanctions would push the country to the brink of doing something drastic, and it should be welcomed that it has now sought to engage with the rest of the world in order to improve the lot of its people.

Israeli concerns may well be justified, but more of the same strategy would not have helped matters, and in fact may have led to the US considering military action. All should welcome the fact that the world appears to be a step further away from that prospect. The tentative agreement reached in November should herald a new dawn of cooperation for Iran, but more steps are needed before it is fully accepted back in the international fold.

In six months time, both sides want to begin discussions over a wider-ranging deal, and so this first step must be grasped by the regime to show it is serious about international engagement again. “There is a genuine desire to carry on down this path from the more pragmatic sectors of the regime but only time will tell,” says Massoudi.